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Soaring Car Insurance Costs are Setting Fire to Inflation

by | April 12, 2024

Forget rising food costs and high interest rates. Soaring auto insurance costs have become a major contributor to resurgent inflation. March saw some of the biggest increases in premiums U.S. motorists have seen in a half-century.

Rivian R1T IIHS crash test REL

Ironically, some of the improvements made to make cars safer also drive up repair costs — which are used to calculate insurance rates.

American motorists are getting hammered. Since December 2021, the typical driver’s auto insurance premium has gone up by 45.8%, according to newly released data from the U.S. Bureau of Labor Statistics.

Last month alone, they rose by 2.7% and have jumped 22.2% since March 2023.

The spike in auto insurance is causing major headaches not only for auto owners but threatens to create problems for auto manufacturers, as well, since larger, more luxurious, and higher performance models are feeling the brunt of the rate hikes. That’s particularly worrisome for Detroit’s Big Three which are dependent upon products like the Ford Mustang and the Chevrolet Silverado for a disproportionate share of their earnings.

Motorists can’t catch a break

Motorists are seeing insurance rates rise as new vehicle prices start to go back down.

Ironically, auto insurance rates are surging just as the price of new vehicles has begun to come back down. Average transaction prices, or ATPs, soared during the COVID pandemic, in part due to a shortage of semiconductor chips that slashed global vehicle production.

By late 2022, ATPs hit an all-time high of more than $50,000, according to industry data. But those chip supplies are back to normal and most auto assembly plants are running at or near full speed. If anything, manufacturers are again ramping up incentives to keep buyers coming into showrooms. As a result, ATPs in March were “trending” towards $44,000, a 3.6% year-over-year decline, reported the National Automobile Dealers Association.

But, in many instances, rising insurance rates are more than offsetting any savings new car buyers might get. For many owners, auto insurance premiums “on some models now account for more than a quarter of the total cost of owning a vehicle,” reported Reuters.

Changing habits

Customers are shifting their buying habits as a result of the surge in insurance rates.

Motorists Headlight.News has spoken to say they’re changing habits, in many cases.

Doug Mandert, a suburban Philadelphian, said he has already seen a big jump this year in premiums on the two family vehicles. He was considering trading them as one model is seven years old, the other four. “The fact (is) that it will probably jump a lot if we replace them. (It) makes us a bit more reluctant to buy new ones.”

As for Lisa Farrell, a broadcast executive based in California, her rates have “jumped 25 percent. No violations, whatsoever. I’m shopping around (for lower rates) but not finding much luck.”

So far this year, the U.S. new car has grown at a slightly faster clip than many had forecast, a more than 5% year-over-year jump in March alone. But that pace may be unsustainable. Companies like Edmunds and Cox Automotive, which track trends in the automotive market, say they’re finding signs that motorists are growing increasingly cautious about buying new vehicles because they can’t afford to take on new loans even while paying more for insurance.

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Why insurance rates are soaring

2024 Chevrolet Corvette E-Ray driving REL

Insurance companies say they are only responding to their own rising costs.

The situation is growing “toxic,” said Douglas Heller, director of insurance for the Consumer Federation of America. He said there are a growing number of motorists letting their policies lapse because they otherwise would struggle to pay for necessities like food or medical coverage.

But insurance companies insist they are simply responding to their own rising costs, contending that they typically must justify any rate hikes with state regulators. They not a variety of factors are contributing to the surge in insurance rates. For one thing, there has been a sharp jump in fatalities and serious injuries related to motor vehicle crashes over the past decade – though there was a slight decline in 2023. Factors such as speeding, drunk and drugged driving, as well as distracted driving, took a large share of the blame.

Insurers also note that today’s new vehicles are loaded with expensive features – ironically including the sensors needed for digital safety systems – that are extremely expensive to replace in the event of a crash.

“All of the technology that we’ve come to rely on makes makes the replacement or repair of these vehicles really, really, costly,” David Sampson, CEO and president of the American Property Casualty Insurance Association, told CNBC. He noted that when he was himself involved in a minor fender-bender this year it cost $1,800 just to replace a fender.

Angry owners – and what they can do?

Not surprisingly, “Overall customer satisfaction with auto insurers has plummeted this year, as insurers and drivers come face to face with the realities of the economy,” Mark Garrett, director of insurance intelligence at J.D. Power, said in a June analysis. Satisfaction levels have fallen to a 20-year low.

More motorists than ever appear to be shopping around, hoping to find reduced premiums. But initial discounts often vanish once it’s time to renew a policy the following year.

Owners with good driving records may find companies that are ready to reward them more than competitors. Some insurers, such as Progressive, now offer policies which require motorists to equip their vehicles with technology that monitors how they drive. Fewer jack-rabbit starts and hard braking episodes can help them earn additional discounts.

But, based on current trends, it’s unlikely to see auto insurance costs flatten out, never mind come back down, anytime soon, according to those that track industry trends.


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