Why Is Car Insurance So Expensive?

If your car broke down two years ago, it probably became a bigger problem than you bargained for.

A confluence of forces were to blame: The Covid pandemic disrupted supply chains, pushing used car prices to record highs and making spare parts hard to get; out-of-practice drivers emerging from lockdowns caused more severe wrecks; and technological advancements like motion sensors made even the simplest parts, like a fender or a rim, expensive to replace.

Things have since improved for car owners — except when it comes to insurance bills. Car insurers are still raising prices steeply: The price of motor vehicle insurance rose more than 22 percent in the year through March, the fastest pace since the 1970s, according to the Bureau of Labor Statistics. According to calculations by the Insurance Information Institute, a trade group, the average 12-month premium for car insurance was $1,280 in 2023, the industry’s most recent figures.

That has made car insurance a prominent factor preventing overall inflation from cooling more quickly, which could force the Federal Reserve to keep interest rates higher for longer even as the prices for many other essential goods and services have slowed.

Geico recently reported a big jump in quarterly profit on higher premiums and lower customer claims. The share prices of other big auto insurers, like Allstate and Progressive, have beaten the rise in the overall market this year.

That has attracted scrutiny from economists. A key reason car insurance costs are rising so fast right now has to do with how the industry is regulated.

How does insurance regulation work?

Insurers are regulated by the states, not the federal government. In all 50 states, insurance companies must follow specific rules about how and when they can raise the price on their policies.

Each state’s laws are broadly similar, and require insurers to ask regulators for permission to raise prices. Insurers have to make a case — with data to back it up — that the increase is necessary and that they will not make too large a profit on the re-priced policies. This application, known in the business as a “rate filing,” involves complicated paperwork that may take weeks or months to resolve.

The data has to include an analysis of loss trends from the past couple of years, as well as projections for replacement costs and profits. If insurers are deemed to profit too heavily, regulators can make them return money to customers.

The threat of returning money is not an idle one. At the height of pandemic lockdowns in 2020, when many cars sat idle, insurers returned almost $13 billion to customers through dividends, refund checks and premium reductions for policy renewals, according to the insurance ratings agency AM Best.

California was one of the most active states: Insurers there returned $3.2 billion to customers in 2020.

Ricardo Lara, the state’s insurance commissioner, “directed the department to do a very close analysis to make sure that drivers weren’t overcharged,” said Michael Soller, a spokesman for the California Department of Insurance. But starting in late 2021, the state became the poster child for a new problem: an epic backlog of insurers’ requests to raise prices.

How a massive paperwork jam explains rising prices.

When the pandemic shut down most economic activity, it messed up insurers’ ability to use the past to predict the future. For months, they were frozen. They did not submit new rate filings to regulators for a spell — until they did, all at once, in the second half of 2021.

The prices of cars and parts were jumping and drivers were back on the roads and crashing left and right after a hiatus behind the wheel.

“You went from this period of incredible profitability to incredible losses in the blink of an eye,” said Tim Zawacki, an analyst who focuses on insurance at S&P Global Market Intelligence. No companies were willing to stick their necks out by offering lower premiums in the hope of winning new business, he said.

“Everyone was together in significantly pushing for rate increases.”

In California, the most populous U.S. state, insurers were getting creamed by expensive claims.

But the state’s regulator did not start approving insurers’ requests to raise rates until near the end of 2022. The backlog grew so large that the average wait time for approvals was longer — by several months — than the six-month policies that insurers wanted to sell.

“When state regulators delay or prevent companies from accurately pricing insurance, insurers may not be able to absorb the costs,” said Neil Alldredge, the president of the National Association of Mutual Insurance Companies, a trade group that represents many home and auto insurers. The squeeze can lead insurers to leave some states or stop some business lines, he added. “Inefficient regulatory environments in states like California, New Jersey and New York, combined with inflation and increased catastrophic losses, have left consumers with fewer choices of insurers and higher costs,” he said.

California is still the slowest state in the continental United States for auto insurance rate filings, taking an average of 219 days to approve a price proposal for a personal auto policy, according to S&P data provided by Mr. Zawacki.

“We fight for consumers by analyzing all of the data, not just what insurance companies spoon-feed us,” Mr. Soller, the California Department of Insurance spokesman, said.

The S&P analysis showed that New Jersey, the 11th-most populous state, had the sixth-longest wait time, while New York, with the fourth-largest population, had the 7th-longest wait times.

“The department performs a comprehensive review of requests to amend rates or rating systems to ensure compliance with New Jersey law,” said Dawn Thomas, a spokeswoman for the New Jersey Department of Banking and Insurance.

Ms. Thomas said the regulator needed to ensure that each proposed premium increase was “reasonable, adequate, and not unfairly discriminatory,” and that sometimes the insurers’ requests needed to be challenged or denied.

A spokeswoman for New York’s regulator declined to comment.

When will the jam clear?

Shortly before the pandemic, the umbrella organization for state insurance regulators, the National Association of Insurance Commissioners, formed a team of data scientists to help regulators deal with their rate filings, which has gotten more complicated in recent years.

The data team became fully operational in 2021 and its mission is now to help speed up the review process: 37 states have signed up to use it.

This month, during a call with analysts to discuss Allstate’s earnings, company representatives said they had recently reopened their California auto insurance business after getting permission to charge higher rates. The company still wanted to raise prices in other states.

In New York and New Jersey, for example, “even with the rate approvals that we got late last year, we still don’t feel like we’re at the appropriate rate level to want to grow in those two states,” said Mario Rizzo, the president of Allstate’s property-casualty business.

How much higher will premiums go?

In 2021, insurers’ personal auto businesses started recording losses. According to David Blades, an analyst for AM Best, the industry lost $4 billion in 2021, $33 billion in 2022 and roughly $17 billion last year.

According to Dale Porfilio, the chief insurance officer at the Insurance Information Institute, the trade group, many companies still need to raise prices to make up for those bad years.

Last year, insurers raised auto premiums by 14 percent, the biggest increase in over 15 years. Mr. Porfilio’s best guess is that premiums this year will rise another 13 percent.

“It’s going to take time for every company to get their rates to where they want to be,” he said.