Car insurance prices still seem out of control for many consumers as premiums jumped again last month. But there may be some cooling ahead.
Core inflation rose 3.2 percent year-on-year in February, according to the latest CPI release on Tuesday. On a monthly basis, it rose by 0.4%, with food prices remaining relatively stable and services inflation showing some easing.
But motor insurance prices – the services-side component of the consumer price index – jumped 20.6% last month from a year earlier on a seasonally adjusted basis. The data for February shows that the jump in car insurance prices at the beginning of the year is not an anomaly – January also saw a rise of 20.6%. The annual rate of auto insurance inflation remains at the strongest rate seen since the mid-1970s, when inflation spiraled out of control.
Still, there are signs that auto insurance inflation may be starting to cool. On a monthly basis, car insurance prices rose by 0.9%. This was significantly slower than the seasonally adjusted 1.4% monthly rate recorded in January and December at a 1.7% rate. Since last August, the motor insurance index has shown a cooling trajectory, although the trend has been somewhat uneven.
Nationally, the U.S. is “either at or very close to the peak” of auto insurance inflation, said Tim Zawacki, principal research analyst at S&P Global Market Intelligence, which covers the U.S. insurance industry. But for individual drivers, Zavacki says it will “vary quite significantly across geographies,” especially in the first half of 2024.
Advertisement – Scroll to continue
“It’s a situation where the different processes that apply from state to state in some cases require longer time frames to bring price changes into the market,” Zawacki says.
In Texas, for example, the pace of increases is beginning to slow as insurers more quickly filed for and received approval for rate hikes last year. But in states like California and New York, it took longer to raise insurance rates — requiring some back-and-forth with regulators — so consumers will likely continue to see significant rate increases.
The total rate hike approved was 14.8 percent nationwide last year, surpassing 2022 when rates jumped 11.4 percent. Zawacki expects the pace of increases to slow in 2024, but there is a lag in how those price increases show up in the CPI. As a regulated industry, insurers need time to get approval for rate increases, and once those increases get the go-ahead, consumers don’t feel the price difference until they renew their policies.
Advertisement – Scroll to continue
Much of the current inflation still stems from the higher claims costs that insurers have incurred to repair and replace vehicles. Although new and used vehicle prices are down from their peaks, they are still well above pre-pandemic levels as measured by the Mannheim Used Vehicle Value Index. In addition, repair costs are also still high. Motor vehicle maintenance and repair prices rose 6.7 percent year-on-year in February, according to CPI data.
More serious car accidents since the Covid-19 pandemic due to issues such as distracted driving and more speeding, as well as the fact that a greater share of claims ended up in litigation, have also helped drive up insurance costs.
Unless there is some kind of reversal in used car prices or labor prices moving back up, insurers should catch up this year. Stephen Crewdson, senior director in the global insurance intelligence group at JD Power expects 2024 to be a year of transition to easing pricing pressures.
Advertisement – Scroll to continue
“The tide has turned,” said Steven Crewdson, senior director in the Global Intelligence Group at JD Power.
Although insurers are pushing for higher rates, their margins are under significant pressure. Some insurers, such as Progressive, have made significant progress in bringing their average combined ratio — essentially insurance claims and expenses as a percentage of premiums earned — back.
“There are definitely signs that insurers are catching up,” says Crewdson.
Advertisement – Scroll to continue
Still, many insurers in the industry are not currently producing what would be considered acceptable margins in this business, Zawacki says. “Companies are quite cautious in declaring victory because the last four years have been an unprecedented time for the industry,” Zawacki said. While insurers have improved their books in the last half of 2023, they are likely to need more time, he added.
But once insurers stabilize their costs, consumers should be able to expect less significant rate increases.
Email Megan Leonhardt at [email protected]
