Car insurance costs are soaring. The cost of the average car insurance policy increased by 22.2% in the year ending in March, according to the Consumer Price Index (the government’s primary measure of inflation).
But your insurance company likely isn’t profiting.
AM Best is a credit-rating agency for insurance companies. The company exists to gauge the health of insurance companies for investors. It tells The New York Times that the auto insurance industry is losing money.
The Times reports that “the industry lost $4 billion in 2021, $33 billion in 2022, and roughly $17 billion last year.”
States Help Set Prices
Your insurance company can’t charge you any rate it wants to charge you. It has to ask state governments for permission to raise rates.
State insurance commissions require the companies to justify their arguments for rate increases. If insurers profit too much, states can require them to return money to policyholders.
“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,” the Times reports.
Pandemic Aftereffects
The COVID-19 pandemic complicated the jobs of the insurance actuaries who argue for rate increases and the state regulators who approve or deny them.
Americans drove less amid pandemic lockdowns. But we also drove more recklessly – increasing accident rates. Drunk and distracted driving peaked.
That situation has improved in recent months. Driving, statistically, grew safer last year.
But, the Times says, “When the pandemic shut down most economic activity, it messed up insurers’ ability to use the past to predict the future.”
Insurers slowed their requests for rate adjustments. Then, as lockdowns lifted, they asked for an unusually high number of changes, creating a paperwork backlog in many states.
Accident Costs Higher
The backlog isn’t the only reason car insurance costs are rising. Accidents are more expensive than ever, particularly thanks to driver assistance systems like blind-spot monitors and smart cruise control. Minor accidents now require replacing or recalibrating expensive sensors.
Even climate change may play a role. Last year, Farmers Insurance left the state of Florida entirely over increasing flood damage claims from more frequent storms.
Rates May Go Higher
But a rush of rate adjustment requests is also complicating everyone’s math. The National Association of Mutual Insurance Companies is a trade group representing the insurance industry. Association president Neil Alldredge tells the Times that slow approvals are causing insurance companies to stop issuing some policies.
He claims, “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.”
Dale Porfilio, the chief insurance officer at the Insurance Information Institute, says insurers are still raising rates to compensate for the pandemic era when they didn’t. “Last year, insurers raised auto premiums by 14%, the biggest increase in over 15 years,” the Times reports. Mr. Porfilio’s best guess is that premiums this year will rise another 13%.”
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.