As cooling inflation offers consumers much-needed relief, many car owners are in for a rude awakening when insurance renewals arrive this year, a new report has found.
Auto insurance prices are expected to increase 8.4 percent in the U.S. in 2023, the biggest rate increase in six years, according to a report by research firm ValuePenguin.
The average cost of full-coverage auto insurance is expected to be $1,780 a year, but rates will vary dramatically between states, the report said.
In Michigan, the state with the highest average cost, car insurance will cost $4,788 a year. In Vermont, the state with the lowest average cost, car insurance will cost $1,104, the report said.
Vehicle owners in 45 states will see their rates increase by at least 1 percent, with rates jumping the most in Illinois, Arizona and New Hampshire, the report said. States where the rate will increase below 1 percent include California, Hawaii, Vermont and Wyoming.
Auto insurers Geico, Progressive and State Farm did not immediately respond to a request for comment.
The significant jump in prices across the country is due to a return to driving patterns resembling life before the pandemic, as many workers return to offices and families resume commuting, said Divya Sangam, spokeswoman for insurance at LendingTree, Value Penguin’s parent company.
“When more people drive, you have more accidents and a higher volume of claims, and that drives up insurance rates,” Sangam told ABC News.
The effect of increased claims volume is exacerbated by increased auto repair costs as bottlenecks in the supply chain continue to drive up the cost of auto parts. The worker shortage also adds to labor costs, Kate Deventer, an insurance writer and editor at Bankrate, told ABC News.
Meanwhile, rising medical costs have raised the amount insurance companies pay to cover accident-related injuries, she added.
“Inflation hits everything everywhere,” Deventer said. “It drives up the cost of claims.”
The price of a new car has risen nearly 8 percent in the past year, while the price of tires and auto parts has jumped more than 10 percent, government data show.
Pandemic-related price pressures related to pent-up demand and supply shortages come roughly three years after the coronavirus outbreak. The average car insurance rate jumped just 1.3% last year, the report found.
“We were surprised that it took so long for the premiums to increase,” Sangam said. “That was a little late.”
The prevalence of extreme weather events is another key factor in the increase in insurance prices, Sangam said.
“With climate change, the biggest story tends to be around the destruction of homes,” she said. “But in reality, when there’s massive flooding like in California right now, cars are destroyed. And with weather damage, we’re talking about the total destruction of cars.”
The rise of electric vehicles has also contributed to the price jump, with insurance costs totaling about 28 percent more for electric vehicles than gas-powered ones, the report said.
The financial pain for car owners is likely to be temporary, Sangam said, predicting that price increases will slow in the coming years as inflation eases further and the cost of auto parts comes down.
“It’s not going to grow at the same rate as it did this year,” she said.
Deventer warned that slowing interest rate hikes next year would depend on easing supply chain bottlenecks and further cooling of inflation.
“It’s hard to say because we don’t know what’s going to happen with the economy,” she said.