A perfect storm
Inflation moves in unpredictable ways. The insurance world is certainly finding out – and so are customers who see their auto insurance bills.
“Auto insurance has been unable to keep up with inflation for the last three to four years and is finally catching up,” said Michael Long, chief executive officer of Axia Insurance Services in Springfield, explaining in part why the national average premium has risen by more than $240 in the past year, according to Bankrate.
There are many other parts to the equation, of course, including the ongoing supply shortage that is generating inflation of everything that goes into cars, from materials to computer chips to labor.
In fact, used car values in 2022 were 37% higher than before, Long said, meaning insurance carriers that used to pay, say, $20,000 for a total car are now paying $30,000. Ultimately, this would be passed on to customers.
Bill Grinnell, managing partner of Webber & Grinnell Insurance, agreed. “Several things drive car prices; one is the supply chain issues and the lack of supply of replacement vehicles and parts, and the increased costs of all of this.
As a result, he continued, “your collision claim that might have cost several thousand dollars before the pandemic is now $3,800. That’s significantly more, and insurance has somewhat lagged that inflation. First the cost of replacement vehicles and parts goes up and this is reflected in the financial statement of the insurance company and they have to react and raise rates. It’s not a leading edge, it’s a trailing edge, but there’s an inflation factor there.”
And it’s not just car insurance. On the home insurance side, the cost of building materials has risen sharply over the past few years, and supply shortages and delays are still plaguing the construction industry. Meanwhile, contractors dealing with these issues, as well as labor shortages, are unable to fill as many jobs as they would like.
“The price to build a home three years ago might have been $175 per square foot, and now it’s $275 per square foot. If you insure a home that was worth $300,000, it’s now $400,000.
“The combination of these two factors has increased the cost of repairs and this is reflected in increased claims payments.” So insurance companies have to adjust their rates to afford these claim payments.”
The other huge factor is the dramatic rise in home values over the past two years, another indicator of supply and demand. “You’re required to insure your house to an educated, calculated measurement of its true replacement value,” Grinnell said. “And the cost to build a home three years ago might have been $175 a square foot, and now it’s $275 a square foot.” If you insure a home that was worth $300,000, it’s now $400,000.
Whatever the reason — and there are obviously many — insurance customers are feeling more pain than usual in their monthly premiums. While there are ways to soften the blow, the key economic factors driving these increases will continue to exist, at least in the short term.
Up, up and away
Plymouth Rock Assurance recently created an infographic that showed customers why home and car prices are rising.
Domestically, labor shortages are cited (the construction industry is down 200,000 trade workers); supply chain shortages and delays with everything from asphalt shingles and pipelines to copper wires and drywall; the cost of lumber and other materials increased by more than 50%; and increased operating costs for energy, transportation, storage, etc.
On the automotive side, higher costs are tied to chip shortages; the shortage of technicians leads to an increase in labor costs by about 6%; parts shortages in repair shops causing delays, higher demand and higher repair prices; and a still-low inventory of vehicles on many lots, driving up the cars’ sticker price – and their trade-in value.
“Not all insurance companies are created equal. Whether it’s the way they handle claims, the way they handle billing, the way they handle cancellations after a loss or two losses, all of those things need to be discussed with an agent because not all contracts are the same.”
“It’s a challenging time for all of us,” Long said. “When we talk to customers, last year’s rates were up about 15% on the auto side and we expect another 8.4% this year.”
Some of the cost factors are unexpected – for example, glass replacement. “With glass claims, it cost several hundred to replace the windshield. I’ve seen them as high as $2,400 because of all the information you get from the windshield sensors.”
Then there is driver behavior. Long noted that accidents are up 7% in 2022 and insurance companies have never seen the volume of lawsuits they’re dealing with.
Grinnell agreed. “The results are worse for insurance companies. The severity of accidents increases and this also increases the cost of insurance.
There are so many ways for customers to reduce insurance costs and some of them are sensible.
“First, don’t be pretentious. Drive carefully,” he said. “Claims really do have a quick impact on your premium, so drive safely and don’t commit motor vehicle offences; don’t get a speeding ticket.
Paying bills on time also helps, he said. “There are so many hidden factors that none of us understand, even at the agency level, that go into setting rates these days, but late payments and being consistently behind and getting cancellation notices is a surefire way to drive up your premiums. So pay your bill on time and even sign up for automatic bill pay.”
While it’s important to have adequate coverage, Grinnell said people with older cars who may not be driving much longer can forgo collision coverage. He did just that with a 12-year-old car he owns but doesn’t drive that much, and it saves him about $450 a year.
Long said he talks to customers all the time about increasing their deductibles. “If you currently have a $500 deductible, maybe look at a $1,000 deductible. If it’s $1000, maybe $2500. We regularly quote a deductible of $2,500,” he noted. Meanwhile, “if a tree falls and it’s a $500 loss, take it and pay for it in full.”
Carriers also offer all kinds of discounts, from safe driver and good student benefits to discounts tied to participation in organizations ranging from the Pan Mass Challenge to the Massachusetts Golf Assoc. “There is a reduction in the Red Cross; if you contribute $25 to the Red Cross, you get 5% off your insurance. This is how you help the community and save money on insurance. Everyone wins with this deal.
Weather or not
The home insurance market has been hit by a series of costly weather events, from hurricanes in Louisiana and Texas to tornadoes in the Midwest to wildfires in California. Insured losses from natural disasters routinely top $100 billion a year these days, and Long said $20 billion of that in 2022 is in auto claims alone.
As noted earlier, the cost of lumber and other building materials (up 33.9% in 2022) and labor (up 27%) already has insurance companies playing catch-up, and weather and climate events are just another challenge to deal with.
“It’s been a fun year for homeowners,” Grinnell said. “Property prices have certainly been affected across the country because of some of these climate changes and weather patterns, the large losses from wind storms.”
He noted one day of “big freeze” last year that affected insurance companies in the region. “It was one of the greatest lost days in history. Pipes burst, and these are expensive claims. Overall, it doesn’t help our region at all.”
Long advises people to be careful when switching carriers due to rising rates, as the new carrier may not have made the same inflation adjustments and the customer will simply have to face it again — while possibly losing benefits like accident forgiveness.
“Not all insurance companies are created equal. Whether it’s how they handle claims, how they handle billing, how they handle cancellations after a loss or two losses, all of those things need to be discussed with an agent because not all contracts are the same.”
On the other hand, Long said clients should absolutely stay in touch with their agent. “How often do you review their insurance? Every year isn’t realistic, but every two to three years you should get a call from your agent saying, “Hey, let’s talk about what’s going on and all the new coverages out there.”
After all, people still need to have enough coverage in case the worst happens. And with home values the way they are now, a total loss can be extremely catastrophic if the coverage isn’t up to par.
“People’s biggest investment is their home. So young people may have time to compensate for the disaster, to build equity in their home if they lose it,” Long said. For older homeowners, inadequate loss coverage can be a real problem.
The bottom row? Insurance costs money, and even more so this year, as customers should expect premiums to rise another 8 percent to 10 percent for both home and auto, Long said.
But when disaster strikes — even a small disaster, like a burst pipe or a side-swiped car — it beats not being covered.