Morgan Avrigean’s car-insurance premium jumped about 80% in the past 18 months, to $720 for a six-month policy. And that’s after the Pittsburgh-based communications strategist, 26, changed insurers twice, bundled her home and auto insurance, and agreed to pay the premium upfront. “Insurance is getting so expensive,” she says.
That’s a familiar lament, considering that the annual inflation rate for U.S. motor-vehicle insurance hit 19.1% in August, the largest year-over-year increase in nearly 50 years. And there is little relief in sight: Prices are likely to keep climbing well into 2024, along with the number and size of claims, ensuring another rough year for auto insurance buyers and sellers.
Nationally, the average cost of car insurance—a mandatory expense for most U.S. households—is nearly $1,700 annually, up 17% through the first half of 2023. Auto insurance now eats up about 2.4% of average household income, according to Insurify’s Mid-Year Auto Insurance Trends Report.
Much of the price growth owes to soaring claims costs, which are closely tied to surging car prices. Both new- and used-car prices rose sharply in recent years, due to supply-chain snarls and chip shortages. The consumer price index’s subindex for new-vehicle prices increased by about 23% from August 2019 to August 2023, while costs for used cars and trucks rose 38%, Barron’s calculates, based on Bureau of Labor Statistics data.
Nor is there much relief on the horizon, given the United Auto Workers’ strike against Detroit’s big three car makers, now entering its third week. The strike is disrupting new-vehicle production and could eat into dealers’ inventories. A lengthy strike could drive the price of both new and used cars even higher.
Rising vehicle prices weren’t the insurance industry’s only problem during the Covid pandemic. Americans’ driving habits worsened. Traffic fatalities climbed for seven consecutive quarters beginning with the third quarter of 2020, including an 18.4% increase year over year in the first half of 2021, to the highest level since 2006. That forced insurers to replace cars at much higher rates—and at staggeringly high cost.
Although fatalities have flattened out in recent quarters, they are still trending above historical levels. That means insurers also face an increased risk of higher medical and liability costs in instances of serious injury or fatality. Although legal costs typically are lower for personal than commercial policies, companies have yet to feel the full impact, due to backlogs in state and federal courts following Covid-era lockdowns.
Even routine repair costs have risen in recent years, due to supply-chain challenges for auto-parts suppliers and labor shortages at repair shops. The increasing complexity of vehicle systems, including electric and hybrid cars, has added to the cost pressure. In August, motor-vehicle maintenance and repair costs rose by 12% year-over-year, according to the latest consumer-price-index report.
Lengthier repair jobs mean insurers are on the hook for longer-term rentals, which has also driven up costs. The average length of a replacement car rental was up 33% in the second quarter compared with prepandemic levels, according to Enterprise.
Extreme weather events likewise have played a role in lifting insurance-industry costs and premiums. While car insurance isn’t affected by weather-related disasters to the same extent as homeowners’ insurance, the National Oceanic and Atmospheric Administration reported that as of early August, there had been 23 individual weather and climate disasters in the U.S. so far this year that cost $1 billion or more in overall damages. The past five years have averaged 18 such events annually.
“There’s just a lot of catastrophic activity,” says Mark Garrett, director for the insurance intelligence practice focused on auto and property claims at. J.D. Power.
This “perfect storm” of events, as Garrett calls it, has prompted insurers to raise rates—and do so aggressively.
Hartford Financial Services
(TRV) all noted in their recent earnings calls that even more rate hikes are slated for the back half of 2023. “Calendar-year profitability continues to be a challenge,” Progressive CEO Tricia Griffith said during the company’s second-quarter earnings call in early August. “We will continue to evaluate the rate and non-rate actions we may need to take.”
Because insurance is a regulated industry, auto insurers need approval for rate increases, which can cause delay in implementation, Garrett says. Many of the rate increases initiated this year haven’t yet hit customers’ wallets or shown up in official inflation data.
The aggregate approved rate change year to date was 11.4% nationwide as of Sept. 22, estimates Tim Zawacki, a principal research analyst with S&P Global Market Intelligence. He expects the rate change for all of 2023 to exceed 2022’s full-year increase of 11.1%, and potentially climb as high as 16%, given the number of rate-change filings pending in larger states, and the uncertain timing of their approval. S&P Global Market Intelligence’s RateWatch shows a cumulative approved rate increase of 24.3% for the period from the start of 2022 through this year to date.
Contrary to expectations, insurers aren’t enjoying much benefit from increased premium prices yet. The industry’s average combined ratio for auto insurance—essentially, underwriting claims and expenses as a percentage of earned premiums—hit 112.2% last year, according to S&P Intelligence. A combined ratio of more than 100% indicates the company isn’t making a profit from insurance underwriting operations.
Next year doesn’t look much better. Zawacki predicts that insurers’ combined ratio for auto insurers will average 105.9% this year and 101.2% in 2024.
Most big, publicly traded insurers with auto lines have done better than the broader industry. While Allstate’s combined ratio averaged 108.6% in the first six months of 2023, Hartford, Progressive, and Travelers managed to keep their overall combined ratios just under 100%. Progressive, which reports monthly, noted that its combined ratio for its personal lines was 97.2% in August, down from 99% earlier this year.
Reserve development is helping to drive up combined ratios. Insurance companies have a claims reserve they use to pay policyholders who have filed or are expected to file legitimate claims on their policies. “Not only is the pricing a bit behind, but the reserving wasn’t fully anticipating the level of inflation on the loss-cost side, so you’re seeing a lot of unfavorable reserve development in the auto business,” Zawacki says, calling that “highly unusual.”
Progressive, for example, has increased reserves and raised rates throughout 2023. As of June 30, the company said it had almost $33 billion in reserves, approximately four times the 2013 level. “The difficult environment of 2023 has presented challenges for our reserving practices,” Griffith acknowledges.
These headwinds put the auto insurance industry in a tight spot with investors, as well. A.M. Best, a credit-rating agency focused on the insurance industry, issued a negative outlook for the U.S. personal auto segment in September 2022, and has maintained that guidance. “We think there has probably been underpricing or a lack of rate adequacy in the private passenger auto market for a little while now,” says David Blades, senior industry analyst with A.M. Best.
As for insurers’ shares, all are trailing the S&P 500 this year, and Allstate, Travelers, and Hartford are down year to date. Progressive is the exception, having risen about 9.6% to a recent $140. Valuations range from around eight times the next-12-month earnings for Hartford to more than 20 times earnings for Progressive, according to FactSet.
Chris Swift, Hartford’s chairman and CEO, estimated on the company’s August earnings call that it would take another two years for conditions to normalize. He said the company has been “really proactive with making the needed adjustments.” and that Hartford expects to “get our book to target profitability probably in early ’25.”
Perhaps the biggest risk in the current environment is that consumers react to price hikes by buying less coverage. Nearly a quarter of car owners cut their coverage in the past year to reduce costs, according to a recent poll of 1,210 U.S. adults conducted by insurance agency Jerry.
J.D. Power found in the second quarter that nearly 15% of vehicle owners had allowed their insurance coverage to lapse at some point in the previous six months, with nearly 30% having cited an inability to pay as the primary reason.
That’s bad news for just about everyone. Uninsured drivers could face jail time, and insurers almost certainly will face higher litigation costs and other expenses to pursue restitution from uninsured consumers when accidents occur.
Eventually, the headwinds will dissipate: Auto insurance inflation will level off as underwriters find the sweet spot that allows them to provide adequate coverage while turning a profit. Until then, expect a bumpy road for buyers and sellers both.
Write to Megan Leonhardt at firstname.lastname@example.org