Auto Insurance Rates: Why The Spike?

Auto insurance rates are increasing for a variety of reasons, including rising repair costs, inflation, supply shortages, climate change, and reinsurance rates. The cost of repairing vehicles has gone up due to supply chain issues, labour problems, and the inclusion of new technology such as parking sensors and lane-departure warnings. Inflation has also played a significant role, with gas prices, food prices, and the cost of vehicles all increasing. Climate change has led to an increase in weather-related events, resulting in more expensive insurance claims. Reinsurance rates, which help insurers pay claims, are also rising, and the lingering effects of the pandemic have contributed to higher accident rates and repair costs. Additionally, factors such as adding a new vehicle or driver, changing addresses, and claims in one's area can also impact insurance rates.

Inflation and rising repair costs

In the context of auto insurance, inflation has contributed to higher costs for new cars, as well as increased repair costs. The microchip shortage, for instance, has resulted in increased costs for new cars, which in turn, has led to higher insurance premiums. Additionally, vehicles today are equipped with advanced technology, such as parking sensors, lane-departure warnings, and better battery technology. While these features enhance safety, they also drive up repair costs.

The impact of inflation and rising repair costs on auto insurance rates is further exacerbated by the increased value of cars. The higher value, along with more intricate parts and advanced technology, has raised the overall cost of repairs. According to the U.S. Bureau of Labor Statistics, overall maintenance and repair costs jumped 8.2% in March 2024 compared to the previous year. This increase in repair costs has prompted insurers to raise premiums as overall car values climbed.

The rise in insurance rates due to these factors has outpaced overall inflation. Auto insurance costs were up about 15% in March 2023 from the previous year, while the latest reading on overall inflation was at 5%. This trend is expected to continue, with insurance companies planning further rate increases to improve profitability.

The combination of inflation and rising repair costs has put pressure on both car owners and insurance companies. Car owners are facing higher insurance rates, contributing to the overall financial burden of car ownership. At the same time, insurance companies are dealing with rising costs, leading to more expensive premiums for their customers.

Increase in accidents

Auto insurance rates are rising due to an increase in accidents. This can be attributed to several factors, including:

Post-Pandemic Driving Habits

During the pandemic, lockdowns and work-from-home arrangements led to fewer cars on the road and, consequently, fewer accidents. Now, with the pandemic easing, more people are returning to their commutes and travelling for leisure, resulting in an increase in accidents and insurance rates. The habit of speeding, which picked up during the pandemic, has also persisted, further contributing to the rise in accidents.

Distracted Driving

The use of mobile phones while driving has been identified as a significant cause of accidents, especially among teenagers. Texting, watching or recording videos, and even voice-activated commands can distract drivers and increase the risk of accidents.

Rise in Electric Vehicles

The popularity of electric vehicles has grown in recent years, with sales reaching 16.3% in 2023, up from 12.9% in 2022. While electric vehicles are environmentally friendly, they tend to be more expensive to repair or replace, which contributes to higher insurance rates.

Weather Catastrophes

Severe weather events, such as wildfires, floods, and tropical cyclones, have become more frequent and intense. These events often result in vehicle damage and insurance claims, leading to increased insurance rates.

Supply Chain Disruptions and Labour Issues

The pandemic caused supply chain disruptions and labour shortages, which have impacted the cost and time required to repair vehicles. Longer repair times mean policyholders incur additional costs by needing rental cars for extended periods.

Increase in Theft of Vehicles and Car Parts

Crime rates, particularly in larger cities, have risen in recent years. The theft of catalytic converters and vehicles has increased significantly, driving up insurance claims and rates.

Distracted driving

The increase in distracted driving has led to more car accidents and more severe accidents, resulting in costly repairs and insurance claims. According to a State Farm® survey, 67% of drivers said that reading or sending texts while driving is distracting or very distracting, and over 70% of drivers reported that watching or recording videos while driving is distracting or very distracting. The National Highway Traffic Safety Administration (NHTSA) also states that looking down to read a text is like driving blind, increasing the risk of accidents.

The impact of distracted driving on insurance rates varies depending on the state and insurer. In some states, insurance companies are prohibited from considering texting and driving tickets when setting rates. However, in other states, a distracted driving ticket can result in a significant increase in insurance rates. For example, in Ontario, Canada, a distracted driving conviction can increase insurance rates by 15% for one charge and 27% for two charges within the same year. In Georgia, a perfect driving record with no points can see an annual increase of a few hundred dollars in insurance rates after a ticket for texting while driving.

To combat distracted driving, many states have implemented laws against it. While there is no federal law specifically prohibiting distracted driving, 48 states have passed laws banning texting and driving, and 24 states have completely banned handheld cell phone use while driving. These laws carry penalties such as fines, license suspensions, demerit points, and penalty premiums.

To avoid increased insurance rates and, most importantly, to ensure the safety of everyone on the road, it is crucial to avoid distracted driving behaviours. Some solutions include using a cell phone mount, syncing your phone to your car, or tucking your phone away in a purse or bag while driving.

Climate change

The increase in severe weather events due to climate change is leading to a rise in auto accidents. Hazardous road conditions, reduced visibility, and fallen debris are all contributing factors to the increase in accidents during and after storms. As a result, auto insurance claims are rising, affecting insurance companies' bottom lines and leading to potential increases in auto insurance premiums.

In addition, the effects of climate change on warmer climates can cause engines to overheat, leading to costly repairs or even engine failure. This, in turn, can result in higher insurance claims and rates.

To adapt to the changing climate, insurance companies may adjust their underwriting practices, coverage options, and pricing models. They may also encourage policyholders to take preventive measures, such as reinforcing structures in areas prone to strong winds or elevating properties in flood-prone regions.

Individuals can also play a role in mitigating the risks and impacts of climate change. By investing in resilient infrastructure and implementing environmentally conscious practices, homeowners and businesses can reduce the chances of storm damage and minimize the financial burden of insurance claims.

Reinsurance rates

Reinsurance, or "insurance for insurers", is an important factor in the rising cost of auto insurance. It is a form of backup coverage that keeps insurance companies solvent in the event of massive claims from extreme weather events or supply chain issues. Reinsurance companies assume some of the risks held by insurance companies in exchange for reinsurance rates.

For example, Florida-based insurance companies are experiencing large spikes in reinsurance rates, which will likely impact auto insurance rates for Floridians. Auto insurance rates in Florida are already 30% more expensive than they were last year.

The increase in reinsurance rates is part of a larger trend of rising auto insurance rates across the United States. From autumn 2022 to autumn 2023, auto insurance rates increased by 19%, the most significant annual increase since 1976.

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