Updated September 13, 2023 at 8:52 AM ET
It’s not only car prices that are giving drivers sticker shock these days — it’s also happening when they open their car insurance bills.
The cost of auto insurance jumped more than 19% during the year ending in August, while overall inflation was 3.7%, according to the Labor Department Wednesday.
On a monthly basis, car insurance prices rose 2.4% between July and August, contributing to a larger than expected jump in core inflation for the month. Inflation was also fueled in August by rising rents and gasoline prices.
Here are four reasons driving the spike in car insurance prices — and what car owners can do to save money.
Drivers have gotten a lot riskier during the pandemic
Insurance premiums actually fell in the early, locked-down stage of the pandemic when many cars sat parked for weeks.
By they time they returned to the roads, however, many drivers seemed to have forgotten how to drive safely.
“People picked up some risky habits,” says Sean Kevelighan, CEO of the Insurance Information Institute. “And we haven’t seen those risky habits go away, even though we have more people on the road.”
The number of fatal auto accidents jumped sharply in late 2020 and early 2021, according to the National Highway Traffic Safety Administration.
While accident rates have since declined, they remain higher than they were before the pandemic, which contributes to the rising cost of insurance.
Repairs and parts replacements are proving costly
The cost of repairing or replacing a car that’s damaged in an accident have also jumped sharply, thanks to snarled supply chains, parts shortages and a tight labor market that’s led to rising wages for auto mechanics.
New and used car prices have begun to fall in recent months, but repair costs are still climbing.
“As much as we’re beginning to see month over month decreases in inflation, which is good news, we also have to set in there that we have seen pretty significant price increases overall that have taken place over the last three years,” Kevelighan says.
Natural disasters are also driving up insurance costs
In addition to car crashes, natural disasters — fueled in some cases by climate change — are also contributing to higher insurance premiums, and not just in states prone to hurricanes or wildfires.
“We see a lot of hail damage,” says Grace Arnold, who oversees Minnesota’s insurance market as the state’s Commissioner of Commerce.
Arnold says the costs of weather occurrences can quickly add up.
“We consistently have billion-dollar storms in Minnesota, even if they don’t have the 24-hour hurricane watch ahead of them,” she adds.
Insurance regulators have to strike a balance
Regulators like Arnold have dual role: trying to keep insurance premiums low enough for drivers to afford them while also keeping insurance companies solvent, so they can keep paying claims.
“We in general have found that the rate increases are justified” she says, by the higher costs that insurance companies are facing.
The Insurance Information Institute says auto insurers paid $1.12 in claims last year for every dollar they collected in premiums. This year, that ratio is expected to be $1.09.
Insurance companies typically count on investment proceeds to cover that shortfall.
“What people really don’t understand is that insurance companies make most of their money by investment of our premiums,” says Harvey Rosenfield, the founder of Consumer Watchdog in California. “When they run into trouble, they have a scapegoat system set up where they blame something else for the fact that they need to raise their rates because they want to offset their investment losses. That’s how the industry works.”
So what can you do?
Most states require drivers to carry auto insurance, but there are ways for drivers to lower their costs.
“The very first thing you’ve got to do is shop around,” Rosenfield says. “There are often better deals to be had.”
Many companies offer a discount for drivers who bundle their auto and home insurance, as TV commercials seem to tout all the time.
Others will lower the premium for drivers who agree to install an app on their phone, allowing the company to track their driving habits.
Opting for a higher deductible can lead to lower premiums, though Arnold cautions against gambling with too little insurance.
“I find it helpful to think through a couple of examples,” she says. “If I had my car stolen, what would that mean for me? If I were in an accident, what would that mean? The last thing you want is to be surprised.”
Arnold says her office gets some complaints about the jump in auto insurance premiums. But more often she hears from people who are unhappy with what they see as a skimpy payout when they file a claim.
A MARTÍNEZ, HOST:
If you have been feeling sticker shock from the price of auto insurance, you are not alone. The price has jumped more than 19% in the last year, far outpacing overall inflation. So what’s driving the increase, and what can car owners do to save some money? Here’s NPR’s Scott Horsley.
SCOTT HORSLEY, BYLINE: It’s hard to remember now, but many car owners actually got rebates on their auto insurance a few years ago. Prices plunged during the locked-down early months of the pandemic, when many cars sat parked for weeks. By the time people ventured back out on the road, a lot of them seemed to forget how to drive safely. Sean Kevelighan, who heads the Insurance Information Institute, says the number of deadly accidents jumped sharply in late 2020 and early ’21.
SEAN KEVELIGHAN: During that time of the pandemic, people picked up some risky habits, and we haven’t seen those risky habits really go away, even though we have more people on the road.
HORSLEY: Fatal accidents have come down in the last year, but they’re still more common than they were before the pandemic. At the same time, Kevelighan says, the cost of repairing and replacing cars has been going up.
KEVELIGHAN: So a lot of factors weighing in there – replacement costs, inflation. When you have increased risk, the price of that insurance will go up.
HORSLEY: That hasn’t stopped insurance companies from trying to win more business, though, as you know, if you watch any TV.
(SOUNDBITE OF MONTAGE)
MELANIE PAXSON: (As character) What are you wearing, Jake from State Farm?
JAKE STONE: (As character) Khakis.
UNIDENTIFIED ACTOR: (As character) I can’t believe how easy it was to save hundreds of dollars on my car insurance with Geico.
DEAN WINTERS: (As Mayhem) And your cut-rate car insurance might not pay for all of this.
(SOUNDBITE OF GLASS SHATTERING)
WINTERS: So get Allstate and be better protected from mayhem.
HORSLEY: Grace Arnold’s kids know all the insurance company advertising jingles, and it’s no wonder. She oversees the Minnesota insurance market and serves on the National Association of Insurance Commissioners. Arnold says natural disasters, fueled in part by climate change, are also driving up insurance costs, and not just in states like Florida or California.
GRACE ARNOLD: We see a lot of hail damage and consistently have billion-dollar storms in Minnesota, even if they don’t have the 24-hour hurricane watch going ahead of them.
HORSLEY: Arnold says insurance regulators have to strike a balancing act, keeping premiums low enough for drivers to afford but high enough to allow insurance companies to keep paying claims. California consumer watchdog Harvey Rosenfield’s a longtime critic of the insurance industry. He admits the cost of repairing and replacing cars has gone up but says that’s not the whole story.
HARVEY ROSENFIELD: What people really don’t understand is that insurance companies make most of their money by investment of our premiums, and when they run into trouble, they have a scapegoat system set up where they blame something else for the fact that they need to raise their rates because they want to offset their investment losses. That is how the industry works.
HORSLEY: The insurance industry says even with the sharp rise in premiums, companies are still paying out more money in claims than they’re collecting from customers. Investment income helps to make up the difference. In most states, car owners are required to have auto insurance, so it pays to shop around. Some insurers will offer a discount to drivers who bundle their auto and home insurance or who install an app on their phone so the company can track their driving. Opting for a higher deductible can also save money. But Minnesota Commissioner Grace Arnold cautions against gambling with too little insurance.
ARNOLD: I find it helpful to think of a couple of examples. You know, if I had my car stolen, what would that mean for me? If I was in an accident, what would that mean for me? The last thing you want to do is to be surprised by something that you thought was different.
HORSLEY: Arnold says her office gets some complaints from drivers about the rising cost of auto insurance, but more often, she hears from those who are disappointed with what they consider a skimpy payout when they file a claim.
Scott Horsley, NPR News, Washington. Transcript provided by NPR, Copyright NPR.
Based in New York, Stephen Freeman is a Senior Editor at Trending Insurance News. Previously he has worked for Forbes and The Huffington Post. Steven is a graduate of Risk Management at the University of New York.