As car prices slow from their pandemic-era spikes, insurance is pushing the cost of car ownership to the brink for many Americans.
New data released this week shows auto insurance costs rose 20.6% in February from a year earlier, matching the largest January increase since December 1976, when they rose 22.4% year over year.
According to BLS data, auto insurance costs increased by 17.4% on an annual basis in 2023, the largest increase since 1976, when they increased by 28.7%.
The sticker shock that is hitting many American drivers is caused by a combination of increasing crashes, crash severity, and geographic factors creating a perfect storm that drives up costs.
'Severity' and personal injury claims increase
The most alarming factor that causes insurance premiums to rise is more serious claims.
AAA spokesman Robert Sinclair told Yahoo Finance: “In general, crashes, injuries and fatalities are increasing, and inflation is driving up repair costs.” .
Mr Sinclair said motorists had picked up “bad habits” on the roads during the pandemic lockdown, which was contributing to their current behavior. For example, as the New York Times reported earlier this year, researchers in Nevada found that during the pandemic, motorists increased their speed (passing through intersections), used seat belts less, and drove drunk. The number of cleared cases has reached near historic highs.
Sinclair also noted that in 2021 amid the pandemic, traffic fatalities increased by 10.5%, reaching the highest level since 2005, even as most Americans stayed home. He also pointed to NHTSA data that revealed that NHTSA said it was the highest rate of increase ever. According to the agency, the number of deaths in 2022 was down only 0.3% compared to 2021.
Insurify, an insurance tech company, said the increase in auto insurance premiums was “primarily due to higher auto parts prices and an increase in the number and severity of claims.” And while price increases may slow, analysts still believe further premium increases are on the horizon.
CFRA analysts said: “After several years of double-digit increases, the size of interest rate hikes is likely to ease somewhat, but some claim cost inflation will continue and the It is likely that we will continue to see a 'long-term high' environment for car prices as the severity and frequency become less favorable.” Kathy Seifert told Yahoo Finance.
Naturally, when a serious accident occurs, the insurance company's loss ratio, or the percentage of collected premiums that the insurance company pays out as claims, increases.
“Roughly speaking, the severity is [the] automatic [business] “Think of vehicle severity as being closer to medium and personal injury severity as being closer to high, so that's where the trend is today,” said Michael Klein, president of Travelers (TRV) Personal Insurance. '' said Michael Klein, president of Travelers (TRV) Personal Insurance. The latest financial results report for January of a major insurance company.
“We have seen a slight shift towards an increase in the number of personal injury claims, which is one of the reasons why we maintain our severity trend estimates at such high levels.” Klein added.
In response, Travelers increased premiums, especially for customers renewing their policies. The price change in renewal premiums for the auto business in the fourth quarter increased significantly by 16.7%, bringing additional premiums of more than $2 billion to the segment compared to the same period last year.
GEICO, the cost-focused insurance company owned by Warren Buffett's Berkshire Hathaway (BRK-A, BRK-B), has also felt the impact of these rising claims weights.
GEICO, the second-largest auto insurer in the U.S. after State Farm, has suffered six consecutive quarters of underwriting losses since the height of the pandemic. The company has since responded by writing more aggressive policies, cutting marketing budgets and raising premiums.
GEICO ultimately generated $3.64 billion in pre-tax revenue from underwriting in 2023, but the trend toward increasing severity of claims remains.
In its parent Berkshire Hathaway's 2023 annual report, the insurance company said that despite the frequency of claims, “average claims will continue to rise in 2023 due to rising auto repair parts prices, labor costs, and medical inflation.” The amount continued to rise.” Proportion of property and motor vehicle damage claims.
GEICO says, “Average claim severities in 2023 will be higher for all claims, including property damage (range 14-16%), collision (range 4-6%), and personal injury (range 5-7%). “The compensation was expensive.” GEICO also called for rate increases in many states in 2022 and 2023 in response to accelerating claims costs.
Meanwhile, insurer Progressive (PGR) noted in its latest earnings report that the severity and frequency of claims is decreasing, providing some relief to insurers' bottom lines and perhaps consumers' wallets. Suggests.
“The severity seems to have eased a little. [in Q4]Progressive CEO Tricia Griffith said this during Progressive's fourth quarter earnings call. “If you look at last year, we've been affected by car repairs, and that seems to be having a little bit of an impact.”More mildly. ”
Complex repairs, rising labor costs
As the cost of personal injury and property damage rises, the incidence of more complex repairs also increases, requiring more expensive mechanics to perform them.
New car prices have increased by more than 20% since 2019, leading to higher parts costs. Additionally, newer cars have more technology, such as sensors and control modules built into the bumpers and exterior panels, so a simple fender bender repair can cost thousands of dollars.
And like almost every industry, labor costs have risen dramatically since the pandemic.
The general manager of a major car dealership based in Southern California told Yahoo Finance, “Most of the expenses in auto repair are labor costs, and labor costs are skyrocketing due to the implementation of minimum wage laws.''
A shortage of technicians to handle the most complex repairs is also driving up costs. “Just to give you some perspective, I have a transmission technician and a diesel technician who make $200,000 a year,” the general manager said.
The number of workers employed in the auto and parts industry declined more than overall employment during the pandemic, dropping by nearly 40% from peak to trough. Employment in the industry subsequently exceeded pre-pandemic levels, but it took until August 2022 to recover.
Another issue for dealers and service businesses is the rise of electric vehicles.
The general manager said that although EVs have lower maintenance rates, EVs cost “much more” when it comes to body and structural repairs. EVs also tend to require more advanced technology solutions, requiring even shorter supply and more specialized technicians.
Progressive CEO Griffiths noted that garage labor costs are still rising, and that his company's auto parts inflation rate is “close to zero,” but that auto service inflation remains “close to zero.” “It's up in the mid-single digits,” he said.
Weather disasters “will not go away”
Where you live is also a big factor in how much you pay for car insurance. In states like Florida, Louisiana, and South Carolina, drivers are paying a premium above the national average due to bad weather.
According to Insurify, Louisiana has the highest per capita cost of auto insurance in the nation, with 4.7% of median household income being spent on auto insurance.
In Florida, Insurify says “rampant” insurance fraud and natural disasters have increased insurance premiums by an average of nearly $3,000 a year.
“The average full coverage insurance premium in Florida is $243 per month, which is impacted by severe weather conditions that are putting a strain on the state's insurers,” Insurify's report said. “According to NOAA, Hurricane Ian caused $109.5 billion worth of damage in Florida in 2022, making it the costliest hurricane in the state's history.”
A relatively mild hurricane season in 2023 gave insurers and policyholders a breather, but hurricanes are not expected to return in the coming years.
CFRA's Seifert said: “While 2023 results benefited from the absence of record-breaking catastrophes (like Hurricane Ian), catastrophes and volatile and unusual weather patterns remain. ” he said.
Pras Subramanian is a reporter for Yahoo Finance.you can follow him twitter And even more Instagram.
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