Car insurance peak hinders the fight against inflation

Job growth, wage growth and business growth are all buoyant, and inflation is down sharply from its 2022 peak. But consumer confidence, while improving, is still sour.

One reason may be the shock to some very visible prices – even as overall inflation has calmed down. The cost of car insurance is an important example of this.

Auto insurance rates rose 1.4 percent month-over-month in January alone and 20.6 percent over the past year. the biggest jump since 1976. It has been a huge hit for those who ride rough 272 million private and commercial vehicles registered in the country. And it has played a role in dampening the “mission accomplished‘ mood inflation that was bubbling on markets at the beginning of the year.

According to a recent private sector estimatethe average annual premium for full coverage car insurance in 2024 $2,543compared to $2,014 in 2023 and $1,771 in 2022.

This peak has several causes, but the most important is clear: cars and trucks are now more expensive, and so is their insurance.

The cost of buying and owning a vehicle makes up a significant portion (about 10 percent) of the entire consumer price index used to track U.S. inflation. From January 2020 to January 2024, the cost of a new vehicle rose more than 20 percent, and the cost of used cars rose even more, while vehicle repairs rose 32 percent overall. Computer chip shortages and other supply chain issues had a brutal impact on auto production, creating bottlenecks that drove up purchase prices, which in many cases have not fallen.

In that context, the roughly 40 percent increase in auto insurance premiums since December 2019 seems “reasonable,” said Mark Zandi, chief economist at Moody’s Analytics.

Insurers are for-profit companies concerned with covering the costs of a wide range of incidents. So as their potential liabilities rise, companies say premiums must rise too so expenses don’t exceed revenues.

As recently as the fourth quarter of 2022, Allstate incurred large insurance losses a net loss of $310 millioneven though premiums had increased.

“The classic example is that a bumper used to be a cheap replacement part, and that’s no longer the case because you have advanced sensors in it – that makes it quite an expensive proposition,” says RJ Lehmann, a senior fellow. at the International Center for Law and Economics, an independent research center.

Companies have also reported more accidents, and more serious ones, leading to more bodily injuries and property damage, as well as higher medical payments – all of which insurers must cover based on the breadth of the policy, hurting net income margins.

“Insurers are OK with this,” said Sonu Varghese, the macroeconomic strategist at Carson Group, a financial firm. “I’m sure there is also old-fashioned margin protection.”

Another force pushing insurers to increase premiums was the rapid increase in interest rates that the Federal Reserve began in 2022. To facilitate returns and cash flow, insurers often reinvest their proceeds. In 2021, insurers held loads of assets that would lose value if short-term interest rates rose. When those interest rates more than quadrupled, many insurers’ balance sheets were bloodied. (Now, however, these insurers have the advantage of being able to reinvest the remaining money at new, higher rates.)

In recent months, trading moves on Wall Street and estimates from industry analysts indicate that the major insurers have completely turned things around.

Shares of Travelers and Allstate hit record highs after the companies announced a new round of premium increases that are expected to cover billions of dollars more than the annual claims they expect to pay. Shares of Progressive, known for its commercials featuring fictional saleswoman Flo, have risen nearly 20 percent since early January, driven by an expected improvement in profit margins.

Many economists are not concerned that auto insurance alone could play a leading role in rekindling overall inflation, but it was a key reason price increases slowed less than analysts expected last month. (Motor vehicle insurance recently contributed more than half a percentage point to the inflation index. If we were to ignore this, overall inflation would have been only half a percentage point away from the Federal Reserve’s desired 2 percent pace.)

Samuel Rines, a market economist and author who closely monitors the balance sheets and pricing decisions of major companies, called the increase in premiums “legitimate cost recovery,” in line with most analysts. Still, he noted that this came “with a lag” compared to most corporate price increases.

That slowdown has frustrated people who have already weathered a series of price shocks. And it has attracted the attention of consumer watchdogs who see the recent spikes as an opportunistic and, above all, aggressive use of everyday ‘cost-plus’ pricing models.

Critics like Hal Singer, an economist at the University of Utah, who calls the recent increase in premiums “ridiculous,” note that consumers are legally required to buy auto insurance and are limited in their ability to shop for the best plan when All major providers are increasing premiums around the same time, and more will follow.

According to an estimate from Insurify, an insurance comparison website, the cost of car insurance will rise another 7 percent this year.

In a quarterly earnings call, Allstate executives said they are not yet done with premium increases in several states, but are sensitive to pushing customers too far — and potentially losing them to competitors who may be the first to pause on the escalation the rates.

“As more states move into the right zone from a margin perspective, we expect the amount we have to pay in those states will decrease,” Mario Rizzo, president of property and liability, said on the call. “But having to handle less is a good thing from a retention perspective, and that’s what we’ll continue to focus on.”

Several leading voices at major banks are telling customers that while future waves of inflation will be choppy, a general disinflationary trend is still in place — with relief around the corner for consumers and those hoping the Fed will cut rates sometime this year.

“While there are likely still some outsized underwriting increases ahead, a sharp decline in year-over-year increases seems inevitable,” David Kelly, chief global strategist at JP Morgan Asset Management, said in a recent note.

“Once it starts,” Mr. Kelly added, “it should turn into a gift that keeps on giving.”