Few Signs of Relief From Insurance-Premium Inflation

Higher sticker prices and several market forces are coming together to mean that, much like stubborn inflation in the overall economy, higher auto insurance premiums seem to be sticking around longer than many in the industry would like to see.

Premiums have jumped 6.8% year-over-year so far in 2023, according to the latest Federal Reserve data.

The biggest driver when it comes to pricing an auto insurance policy (after the driving record and actuarial risk of the individual policyholders) is the cost of the vehicle. Unfortunately for consumers, new vehicle prices are up 4.6% year-over-year as of May, according to the St. Louis Federal Reserve. That news is tempered a bit by the news from the used-car and -truck market, which saw prices dip a bit from the same time in 2022, down 4.2% year-over-year, but that was only after their historic years-long run-up following the pandemic.

Persistent vehicle-price inflation has been driven by a number of factors, not the least of which included snarled supply chains that buckled during the pandemic.

When semiconductors were in short supply, many manufacturers responded by shifting production to their highest-profit lines – often large SUVs and pickups.

That helped automakers and dealers triage their losses. But now, several years after the depths of the pandemic, and even with the worst of the chip supply chain largely smoothed out, more than a year’s worth of value-line vehicles are missing from the market, meaning what is available for buyers is going to veer toward the pricier end.

What’s more, with supply short, many dealers took the opportunity to squeeze out as much profit as they could, with dealer markups partially driving inflation, according to an analysis by the Bureau of Labor Statistics.

But if someone is trying to lay the cost of insurance premiums squarely on the auto industry’s doorstep, they need to take a step back and realize there are many other factors in play, too.

During the pandemic, Americans drove less. Without a daily commute or vacations to take, there were just fewer miles driven on American roadways. Those days are over.

According to the National Highway Traffic Safety Admin., 2022 saw a return to America’s love of the roadway, with drivers logging a nearly 1% increase in miles driven over the same period in 2021 and more miles driven than before the pandemic began.

And while traffic fatalities were down in 2022, they were still at near-record highs of 1.35 fatalities per 100 million vehicle miles traveled.

More miles on the road mean more opportunities for a crash, and that translates to higher insurance premiums.

When there is a crash, repairing the vehicle is also getting more expensive. The cost of parts and labor continues to go up, with the overall cost of repairing a vehicle after a crash increasing 13.5% year-over-year as of May 2023.

One specific thorn for the auto insurance industry continues to be catalytic converter thefts. According to the National Insurance Crime Bureau, catalytic converter thefts increased 288% for the year in 2022.

Stolen catalytic converters can earn a thief a quick $20 to $250 on the black market because of the precious metals found in them, but for an owner, the replacement costs average between $1,000 and $3,500. That cost exceeds the comprehensive deductible for most policyholders, pushing the loss to the auto insurers.

The nationwide migration to battery-electric vehicles also promises to continue to push up auto insurance premiums in the medium term.

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Insuring a BEV tends to cost a little more than the internal-combustion-engine version of that vehicle because of the additional training technicians need to work on them, coupled with the still-thin repair-part market, as well as the tendency to have to “total” a BEV after relatively small accidents if the battery pack gets damaged. That is because the battery pack represents a significant portion of the vehicle’s value, and replacing it rarely makes more sense than just declaring the vehicle a total loss.

While the 2023 bump in insurance premiums hasn’t been extreme so far, it seems persistent and driven by more than just passing influences. Many of these forces aren’t quick-fix variables, so even modestly higher premiums seem more likely than not in the coming months.

Michael Giusti (pictured, above left) is a senior writer and analyst for InsuranceQuotes.com.