Auto Insurance Spike Hampers the Inflation Fight

Job growth, wage growth and business growth are all lively, and inflation has steeply fallen from its 2022 highs. But consumer sentiment, while improving, is still sour.

One reason may be sticker shock from some highly visible prices — even as overall inflation has calmed. The cost of car insurance is a key example.

Motor vehicle insurance rose 1.4 percent on a monthly basis in January alone and has risen 20.6 percent over the past year, the largest jump since 1976. It has been a huge hit for those driving the roughly 272 million private and commercial vehicles registered in the country. And it has played a part in dampening the “mission accomplished” mood on inflation that was bubbling up in markets at the beginning of the year.

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

That spike has a variety of causes, but the central one is straightforward: Cars and trucks are pricier now, so insurance for them is, too.

The cost of buying and owning a vehicle constitutes a substantial chunk (about 10 percent) of the entire Consumer Price Index used to track U.S. inflation. From January 2020 to January 2024, the cost of a new vehicle rose more than 20 percent, and the cost of used cars was up even more, while vehicle repair overall increased 32 percent. Shortages of computer chips and other supply-chain issues had a brutal impact on auto production and created bottlenecks that drove up purchase prices, which in many cases haven’t gone down.

In that context, the increase in vehicle insurance premiums of about 40 percent since December 2019 “appears reasonable,” said Mark Zandi, the chief economist at Moody’s Analytics.

Insurers are for-profit firms in the business of covering the cost of a wide array of incidents. So when their potential liabilities spike, companies say premiums need to rise as well so expenses do not outstrip their revenues.

As recently as the fourth quarter of 2022, large underwriting losses brought Allstate a net loss of $310 million, even though it had increased premiums.

“The classic example is that, you know, a bumper used to be a cheap replacement part, and it’s no longer that way because you have advanced sensors in there — that makes it quite an expensive proposition,” said R.J. Lehmann, a senior fellow at the International Center for Law and Economics, a nonpartisan research center.

Companies have also reported more accidents, and more severe ones, which lead to greater bodily injury and property damage as well as higher medical payments — all of which insurers can be liable to cover based on the breadth of the policy, hurting net income margins.

“Insurers are coming to terms with this,” said Sonu Varghese, the macroeconomic strategist at Carson Group, a financial firm. “I’m sure there’s some good old-fashioned margin protection going on, too.”

Another force that prompted insurers to raise premiums was the rapid increase in interest rates that the Federal Reserve began in 2022. To smooth returns and cash flow, insurers often reinvest their proceeds. In 2021, insurers were holding loads of assets that would lose value if short-term interest rates rose. When those interest rates more than quadrupled, the balance sheets of many insurers were bloodied. (Now, however, these insurers have the benefit of reinvesting leftover cash at new, higher rates.)

In recent months, trading moves on Wall Street and the estimates of industry analysts indicate that the big insurers have fully turned things around.

Shares of Travelers and Allstate hit record highs after the companies announced another round of premium increases that are expected to cover billions of dollars more than the annual claims it expects to pay. Shares of Progressive, known for its commercials with the fictional saleswoman Flo, have soared nearly 20 percent since the beginning of January, driven by a similarly anticipated improvement in profit margins.

Many economists are not worried that auto insurance alone could play a leading role in any reigniting of overall inflation, but it was a major reason that price increases slowed less than analysts expected last month. (Motor vehicle insurance most recently contributed more than half a percentage point to the inflation index. Excluding it would have put overall inflation only half a percentage point away from the Federal Reserve’s desired 2 percent pace.)

Samuel Rines, a market economist and author who closely tracks the balance sheets and pricing decisions of large firms, called the jump in premiums “legit cost-covering,” in line with most analysts. Yet he noted that it had come “with a lag” behind most corporate price increases.

That lag has frustrated people who have already navigated a battery of price shocks. And it has attracted the attention of consumer watchdogs who view the recent spikes as an opportunistic and especially aggressive use of run-of-the-mill “cost-plus” pricing models.

Critics like Hal Singer, an economist at the University of Utah, who calls the recent run-up in premiums “ridiculous,” note that consumers are legally required to buy car insurance and are limited in their ability to shop around for the best plan when all major providers are lifting premiums around the same time, and telegraphing more to come.

According to one estimate by Insurify, an insurance comparison shopping website, the cost of car insurance will go up an additional 7 percent this year.

In a quarterly earnings call, Allstate executives said that they were not done with premium increases in several states, but that they were sensitive to pushing customers too far — and potentially losing them to competitors that may pause first on the escalation in rates.

“As more states get into the right zone from a margin perspective, we would expect the amount of rate we need to take in those states to diminish,” Mario Rizzo, president of property and liability, said on the call. “But having to take less rate is a good thing from a retention perspective, and we’ll continue to focus on that.”

Several leading voices at major banks are telling clients that although the inflation waves ahead will be choppy, an overall disinflationary trend is still in place — with relief around the corner for consumers and those hoping that the Fed will lower rates sometime this year.

“While some further outsized insurance increases are likely ahead of us, a sharp drop in the year-over-year increase would seem to be inevitable,” David Kelly, the chief global strategist at J.P. Morgan Asset Management, said in a recent note.

“Once it starts,” Mr. Kelly added, “it should turn into the gift that keeps giving.”