Rising auto insurance hampers fight against inflation

Job, wage and business growth are buoyant, and inflation has fallen sharply from its 2022 highs. But consumer confidence, while improving, remains sour.

One reason could be the shock caused by some highly visible prices – even though overall inflation has calmed. The cost of car insurance is a key example.

Auto insurance increased 1.4 percent on a monthly basis in January alone and has increased 20.6 percent over the past year. the biggest jump since 1976. It has been a huge success for those who drive roughly 272 million passenger and utility vehicles registered in the country. And this helped to alleviate the “Mission accomplished“the mood is right inflation it was boiling on the stairs at the beginning of the year.

According to a recent estimate from the private sectorTHE average annual premium for full coverage car insurance in 2024 is $2,543compared to $2,014 in 2023 and $1,771 in 2022.

This increase has various causes, but the main one is simple: cars and trucks are more expensive now, so is their insurance.

The cost of purchasing and owning a vehicle makes up a substantial portion (about 10%) of the entire consumer price index used to track inflation in the United States. From January 2020 to January 2024, the cost of a new vehicle increased by more than 20%, and the cost of used cars increased even more, while overall vehicle repair increased by 32%. Computer chip shortages and other supply chain issues have had a brutal impact on auto production and created bottlenecks that have driven up purchasing prices, which in many cases have not not lowered.

Against this backdrop, the increase in auto insurance premiums of about 40% since December 2019 “seems reasonable,” said Mark Zandi, chief economist at Moody’s Analytics.

Insurers are for-profit companies whose mission is to cover the cost of a wide range of incidents. So when their potential liabilities increase, companies say premiums must also increase so that expenses don’t exceed revenue.

As recently as the fourth quarter of 2022, significant underwriting losses caused Allstate a net loss of $310 millioneven if he had increased the bonuses.

“The classic example is that, you know, a bumper used to be a cheap replacement part, and that’s no longer the case because it contains advanced sensors – which makes it quite an expensive proposition” , said RJ Lehmann, lead researcher. at the International Center for Law and Economics, a nonpartisan research center.

Companies also reported more accidents, and more serious accidents, which result in greater bodily injury and property damage as well as higher medical costs – all of which insurers may be required to cover depending on the extent of the police, which hurts net margins.

“Insurers are accepting of this,” said Sonu Varghese, a macroeconomic strategist at Carson Group, a financial firm. “I’m sure there’s good old-fashioned margin protection as well.”

Another force that prompted insurers to raise premiums was the rapid interest rate hike that the Federal Reserve began in 2022. To smooth returns and cash flows, insurers often reinvest their products. In 2021, insurers held many assets that would lose value if short-term interest rates increased. When these interest rates more than quadrupled, the balance sheets of many insurers were devastated. (Now, however, these insurers have the advantage of reinvesting their remaining cash at new, higher rates.)

In recent months, trading moves on Wall Street and industry analyst estimates indicate that major insurers have completely reversed course.

Shares of Travelers and Allstate hit record highs after the companies announced a new round of premium increases that are expected to cover billions of dollars more than the annual claims they expect to pay. Shares of Progressive, known for its ads with fictional saleswoman Flo, have soared nearly 20 percent since early January, buoyed by a similarly expected improvement in profit margins.

Many economists are not concerned that auto insurance alone could play a leading role in a possible revival of overall inflation, but it is one of the main reasons why the rise in Price slowed less than analysts expected last month. (Auto insurance recently contributed more than half a percentage point to the inflation index. Excluding it, overall inflation would have been only half a percentage point away from the pace of 2% desired by the Federal Reserve.)

Samuel Rines, a market economist and author who closely follows the balance sheets and pricing decisions of large companies, called the premium hike “legitimate cost coverage,” agreeing with most analysts. He noted, however, that this measure came “with a certain delay” compared to most companies’ price increases.

This lag has frustrated people who have already gone through a battery of price shocks. And it has caught the attention of consumer watchdogs, who view the recent hikes as an opportunistic and particularly aggressive use of ordinary “cost-plus” pricing models.

Critics like Hal Singer, an economist at the University of Utah, who calls the recent rise in premiums “ridiculous,” point out that consumers are legally required to purchase auto insurance and are limited in their ability to shop for the best plan when they want. all major providers are increasing their premiums around the same time and announcing more to come.

According to an estimate from Insurify, an insurance comparison site, the cost of car insurance will increase. another 7 percent This year.

On a quarterly earnings conference call, Allstate executives said they were not done with premium increases in several states, but were sensitive to the idea of ​​pushing customers too far – and potentially losing them to competitors who might stop the price hike first.

“As more states get into the right zone from a margin perspective, we expect the amount of rate we have to take in those states to decrease,” said Mario Rizzo, president of ownership and liability, upon appeal. “But having to take less rate is a good thing from a retention standpoint, and we will continue to focus on that.”

Several figures from large banks tell their clients that even if future waves of inflation will be unstable, a global disinflationary trend East still in place — with relief looming for consumers and those hoping the Fed will cut rates this year.

“While further outsized increases in insurance are likely ahead, a sharp decline in year-over-year growth seems inevitable,” said David Kelly, chief global strategist at JP Morgan Asset Management, in a recent note.

“Once this gets going,” Mr. Kelly added, “it should turn into a gift that keeps on giving.”