The State of the Auto Insurance Market
By CRA
Auto insurance premiums keep rising, but rising claims costs mean insurers still aren’t making a profit.
As a result, more premium hikes are likely. Catch up with what’s happening in the auto insurance market as we head into 2024.
Auto Insurance Rates Are Rising
Even people who haven’t filed a claim may have been hit with a premium hike at their last renewal. Data from the Bureau of Labor Statistics shows that auto insurance premiums were up 19.1% year over year in August 2023. Prices hadn’t surged by that much since 1976.
Insurers Aren’t Achieving Underwriting Profitability
Some policyholders might assume that auto insurers are making a decent profit after all these premium hikes, but that’s not the case. Premiums have been increasing, but not fast enough to keep up with rising claims costs. According to Fitch Ratings, the U.S. commercial auto insurance market has failed to achieve underwriting profitability in 11 of the last 12 years and it looks like the sector will see significant losses again in 2023. S&P Global says personal lines insurers are also struggling.
Claims Are More Severe
To control claims costs, insurers need to look at both claims frequency (how often claims occur) and claims severity (how much claims cost). Unfortunately, claims severity has increased recently. A 2023 report from LexisNexis shows that property damage increased by 8.5% from 2021 to 2022, whereas bodily injury severity increased by 8% to 10%. In the first nine months of 2022, 27% of collision claims were total losses.
Reckless Driving Has Increased
When the COVID-19 pandemic shut down businesses, fewer people were on the road, but many of the drivers who remained became more reckless behind the wheel. The NHTSA says driving patterns changed in 2020, with some drivers speeding, driving under the influence of drugs and alcohol, and failing to use seat belts. This led traffic fatalities to increase – the NHTSA says 38,824 people died in motor vehicle crashes in 2020 and 42,915 in 2021.
Repairs Are More Expensive
Insurers have also been dealing with higher repair costs, which add to the cost of claims. When bumpers, side mirrors, and other parts include expensive sensors, repairs may be much more costly – even a minor fender bender may require calibration. Electric cars can be especially expensive to repair – according to Reuters, electric vehicles may be rendered total losses due to minor damage to batteries.
On top of these issues, repair shops have been dealing with parts and labor shortages. J.D. Power says the average time to return vehicles to policyholders after repairs increased from 12 days before the pandemic to 23 days in 2023. These delays can add to the total costs – for example, if the insurer provides coverage for rental vehicles.
Litigation Is Adding to Overall Costs
Lawsuits are another area where, once again, costs have been increasing. As the NAIC explains, social inflation refers to the trend of rising claims costs in excess of normal inflation, often attributed to higher litigation costs resulting from plaintiffs looking for monetary relief for injuries. Nuclear verdicts occur when juries award massive amounts, particularly in excess of $10 million.
Social inflation and nuclear verdicts can impact any type of liability insurance. However, according to the Institute of Legal Reform, auto accident, medical liability, and product liability cases are the most likely to be subject to this trend. Between 2010 and 2019, the median jury verdict increased from $19.3 million to $24.6 million – an increase of 27.5%. For comparison, inflation only increased by 17.2% during the same time period.
Controlling Auto Insurance Costs
Many policyholders have already seen substantial rate hikes, but further increases may lie ahead. According to USA Today, the Director of Corporate Communications at the Insurance Information Institute says car insurance rates are expected to continue to increase in 2024.
These increased costs come at a time when consumers are already struggling with a higher cost of living, due to inflation. Other lines of insurance have seen recent hikes as well. Brokers and their clients should take steps to prepare:
• Budget for higher costs. Although policyholders may be able to save money by shopping around, rate hikes are occurring throughout the auto insurance market. This means premiums will likely be more expensive than they used to be.
• Consider alternative strategies. For example, some drivers and fleet operators may be able to save money with usage-based insurance and telematics programs.
• Reduce risks. You can reduce the chance of a claim by being a safe driver, maintaining your vehicle, and parking in a safe area. In the long run, this will lower your costs.
When dealing with a difficult auto insurance market like this one, it helps to have an expert in your corner. As an independent agency, we can help you shop the market, compare your options and find the best choice for your specific situation.