Auto Insurance Premiums: Why The Annual Increase?

Auto insurance rates are on the rise, with increases of 8.4% in 2023 and 17.1% in the past year, according to different sources. There are several factors contributing to this increase, including individual risk factors such as driving history, credit score, and the number of drivers and vehicles on a policy. Additionally, external factors like inflation, supply shortages, climate change, and reinsurance rates are also driving up insurance costs. While some factors are beyond an individual's control, there are proactive steps that can be taken to reduce auto insurance costs, such as taking advantage of discounts, bundling policies, and improving one's driving record.

Inflation and rising repair costs

Repair costs are also increasing due to several factors. Firstly, there is the impact of supply chain issues and labour shortages, which have led to higher mechanic wages and increased costs for car parts. This means that even a minor fender bender can be expensive, as modern cars often have cameras, proximity sensors, and other technologies that are costly to repair or replace. These technologies are also one of the reasons why new cars are generally more expensive to insure than older models.

Additionally, natural disasters, such as hail damage and hurricanes, have contributed to higher insurance costs. These disasters can cause extensive damage to vehicles, leading to more costly repairs.

The rising repair costs have outpaced the overall inflation rate, with repair costs increasing by 11.6% in one year, compared to an inflation rate of 3.5%. This has resulted in insurance companies adjusting their premiums to account for these higher costs.

To mitigate the impact of rising repair costs on insurance premiums, insurance companies may offer usage-based insurance programs that base policy costs on a driver's behaviour and telematics data. These programs can provide discounts or special prices for safer drivers.

More accidents and higher insurance claims

Auto insurance rates are influenced by a variety of factors, and one significant reason for their annual increase is the rise in the number of accidents and insurance claims. This trend is not limited to individual behaviour but is also driven by broader societal patterns.

Accidents, whether at-fault or not-at-fault, play a pivotal role in increasing insurance rates. Insurance companies perceive drivers with an accident history as riskier to insure. At-fault accidents almost always lead to higher insurance rates, as insurers may consider the driver more prone to future accidents. Even in cases where the driver is not at fault, rates may still increase, as insurers possess data indicating a propensity for not-at-fault accidents among certain drivers.

The type of accident and the driver's state also influence the rate increase. For instance, an at-fault accident causing property damage of $10,000 can result in an average annual rate increase of $848 for a full-coverage policy. Additionally, state regulations vary, with some states, like Oklahoma and California, prohibiting insurers from raising rates for not-at-fault accidents.

Comprehensive claims, which include incidents like car theft, vandalism, and weather-related damage, can also contribute to higher insurance rates. Insurers view these claims as indicators of a higher likelihood of future claims.

Beyond individual driving records, societal trends also impact insurance rates. Distracted driving, for example, has led to an increase in accidents, and the presence of more uninsured or underinsured drivers on the road further exacerbates the issue. Moreover, natural disasters and supply chain issues have contributed to rising auto repair costs, which insurers consider when determining premiums.

It's important to note that insurance premiums are not raised arbitrarily. They reflect the increasing expenses associated with paying claims, including rising healthcare, salary, and living costs.

Changes to your personal situation

Change of Address

Moving to a new location can affect your car insurance rates. Location is a primary factor in determining car insurance rates, and insurers assign a risk level based on your address. Urban areas, for example, tend to have higher car theft and vandalism rates, leading to higher insurance costs. Additionally, factors such as weather patterns, the cost of medical care and car repairs, and the frequency of lawsuits in your state can influence your premium.

Adding a New Vehicle

If you purchase a more expensive or luxury car, your insurance rate is likely to increase. This is because such vehicles are more prone to theft and have higher repair or replacement costs. Even switching to a different make or model can result in a higher premium if the insurance company deems it less safe or more costly to fix.

Adding a New Driver

Including a new driver on your policy, especially a teenage or inexperienced driver, can drive up your insurance rate. Insurance companies view young or new drivers as high-risk due to their lack of driving experience. Additionally, factors such as the driver's gender, driving record, and credit score can also influence the premium.

Changes in Driving Habits

If you start driving more miles or exhibit unsafe driving behaviours, your insurance rate may increase. Insurance companies consider the number of miles driven and driving history when calculating premiums. Speeding tickets, accidents, and reckless driving incidents are all factors that can lead to higher insurance rates.

Age and Gender

While not all states allow it, insurance companies in some states may use age and gender as factors in determining insurance rates. Younger drivers, especially males, tend to engage in riskier driving behaviours and have less experience, resulting in higher premiums. Insurance rates may also increase for seniors around their mid-70s due to perceived increased risk.

Credit Score

In some states, insurance companies use credit-based insurance scores to determine your premium. A lower credit score may indicate a higher risk to the insurer, resulting in a higher insurance rate. Correcting any incorrect information on your credit report can help reevaluate your premium.

External factors like natural disasters

External factors, such as natural disasters, have a significant impact on the rise in auto insurance premiums. The increasing frequency and severity of natural disasters, including hurricanes, floods, wildfires, and severe storms, have led to a rise in insurance claims and payouts by insurance companies. This has resulted in higher auto insurance rates for customers, even if they have not been directly affected by these events.

In recent years, the United States has experienced an increase in the number and impact of natural disasters. According to the National Centers for Environmental Information (NCEI), there were 28 separate billion-dollar disasters in 2023, and by June 2024, there had already been 11. The rising cost of repairing or replacing vehicles damaged in these disasters has contributed to higher insurance premiums.

Natural disasters can cause extensive damage to vehicles, and the cost of repairing or replacing them can be significant. Floods, in particular, can result in total losses for cars due to engine, transmission, and electrical system damage. The increasing frequency of natural disasters is a major concern for insurance companies, and they are reflecting these risks in their pricing.

Climate change is also playing a role in the increasing frequency and severity of natural disasters. Extreme weather events fueled by climate change are becoming more common and are contributing to the rising cost of insurance. As the frequency of extreme weather events continues to rise, insurance companies are anticipating higher claims and are adjusting their rates accordingly.

The impact of natural disasters on auto insurance rates is not limited to high-risk areas. Even in regions not typically associated with natural disasters, such as Minnesota, the costs of weather-related damage can be significant. The increasing frequency and severity of natural disasters across the country are contributing to the rise in auto insurance premiums for all customers.

Your driving record and history

Insurance companies typically look back at your driving record over the previous three to five years when setting insurance rates. Some states may allow insurance companies to look back even further, up to ten years in some cases. During this period, any incidents such as accidents, speeding tickets, or driving under the influence (DUI) can result in higher insurance rates. For example, one accident can increase your insurance rates by an average of $80 per month, while a speeding ticket can raise your rates by $45 per month.

The impact of your driving record on insurance rates can vary depending on the insurance company and state regulations. Insurance companies evaluate the severity and frequency of driving infractions when determining your risk profile. Even a single speeding ticket or minor moving violation can lead to an increase in your insurance rates.

Additionally, your driving record can affect your ability to obtain insurance coverage. If you have a history of frequent accidents, traffic violations, or a DUI conviction, you may be considered a high-risk driver. In such cases, you may have difficulty finding insurance coverage from standard insurance companies. You may need to purchase non-standard insurance designed for risky drivers or obtain coverage from your state's assigned risk pool.

It's important to note that not all driving incidents will affect your insurance rates equally. Minor traffic violations, such as a broken tail light, may not have a significant impact on your rates. However, more serious violations, such as reckless driving or driving while intoxicated, will likely result in higher premiums.

To maintain lower insurance rates, it's essential to practice safe driving habits and avoid accidents and traffic violations. By driving responsibly and adhering to traffic laws, you can improve your driving record over time, which will reflect positively on your insurance rates.

Frequently asked questions