A Wall Street Journal story today got me pulled down a rabbit hole. The point of the article was that, except for gasoline, the cost of owning a car has been going up, up, up recently. This got me curious, so I took a look at auto-related costs over the past couple of years:
It turns out this is really a story about auto insurance. Parking and auto parts have gone up less than wages, and after a year of big price hikes repairs have slowed down a lot over the past half year.
Insurance, conversely, has gone up like a rocket and has kept going up. What gives?
Part of the answer comes from choosing 2022 as the starting point. Here are auto insurance premiums adjusted for inflation going back to before the pandemic:
The peak pandemic years of 2020-21 were actually rare profitable ones for auto insurers, and they lowered their premiums in response. You probably didn't notice this since premiums mostly stayed about the same and only dropped relative to inflation. But it really happened, and insurers found themselves stuck with those low premiums in 2022, when things went back to normal.
Or worse than normal, actually. We've been driving like maniacs ever since the pandemic started, and accident rates have stayed high through the end of 2023. What's more, as you can see in the top chart, auto repair costs have recently gone up a lot. The combination of these two things has led to premiums (a) going up to claw back the earlier declines, and then (b) going up more to make up for the increasing cost of accidents.
That's all a pretty reasonable story. There's just one thing that nags at me:
Auto insurers almost never make a profit on writing premiums. They take a loss and then make it up by investing the money we give them. As you can see, overall underwriting losses—which include all payouts for accidents—have indeed gotten bigger over the past couple of years, but they're still less than they were before the pandemic. If that's the case, why do premiums in real terms need to be higher than they were before the pandemic?
I don't know. The insurance biz is extraordinarily complicated and opaque, which makes it hard to figure out what's really going on. However, there's one thing that suggests insurance companies really are justified in their rate hikes: state commissioners everywhere are approving them, even in historically adversarial states like California.
Bottom line:
- Auto premiums have gone up 40% over the past two years.
- But only 26% after adjusting for inflation.
- And only 13% if you start in 2019 and include the pandemic years when premiums declined.
Make of this what you will.
Doesn't it have something to do with the fact that insurers promise a return to investors who provide their reserves? When those folks can instead park their funds in CDs or other low to no risk investments for 5% or more, the insurance companies in turn have to promise higher returns. Therefore they must charge higher rates.
at least two major insurers are mutual companies. theoretically, at least, their "investors" are their policyholders.
Auto repairs are supposed to be much more expensive due to all the electronics and sensors in the bodywork. A small fender bender that previously was just a fill and paint job or fender replacement is now a multi day electronics job with highly technical recalibration needed by expensive equipment. I am surprised that this doesn’t show up in the data.
BTW, it’s a real pain to have to disconnect from my VPN to be able to post here!
a lot of that fancy electronic stuff reduces the likelihood of accidents so there is some offset. i drove a 2007 fit until this past summer. along with my wife's 2010 corolla, i paid $150 a month for insurance. that's with minimal mileage. this summer, we replaced the fit with a 2023 corolla hybrid. my insurance shot up by about $40 a month.
Agree. I just had to get a windshield replaced due to a flying rock. It took half an hour to replace the glass and two hours to recalibrate the driver assistance sensors. The whole thing was covered with no deductible, so it pretty offset a year of premium. Well worth the safety (both the glass and the sensors) but it must put upward pressure on the premium.
BTW, it’s a real pain to have to disconnect from my VPN to be able to post here!
I feel your pain. CCP sensors don't block Kevin's blog, but I normally have my VPN on at all times regardless. One work around I've found is: just do a one word comment with my iPhone (where my VPN normally isn't engaged)...something like "test." Then I go back and "edit" (ie, write) a full comment. The VPN issue doesn't prevent edits, only new comments.
Repairs are also more expensive as Private Equity started buying up auto shops and raising prices. My former local shop doubled their prices unexpectedly last year, I am no longer a customer.
And how have those investments been doing recently?
Yes, premiums are dependent on how well investments are doing. This is not the first time that premiums have gone up because markets tanked. But market outlooks are good now and pressure on premiums may decrease.
Voilà. The purpose of insurance is to reduce economic risk to policy holders and speed repairs and dissipate disputes.
Hah. It's to make money, screw the policy holders.
The purpose of insurance (generally and here specifically) is to balance and (re)-distribute / share risk, not "reduce" it - reduction of risk comes from reduction of the actions that generate risk.
A bankrupt / insovlent insurance fund doesn't pay out and that genuinely screws policy holders.
Under-pricing risk leads to insolvency and as well public funds covering what shouldn't be publicly covered (see flood insurance, its subsidisation and engendered over-building in high-risk for flooding areas - there is no 'risk reduction' from underpriced insurance, rather under-priced insurance leads to higher risk as the risk felt by the actor is diminished, leadin to more risk taking)
Myopic innumerate reactions....
He said _economic_ risk, you innumerate dumbass.
It's pretty funny watching him flounce in, comment about how everyone else is stupid while being completely wrong himself.
I think it's GREAT that auto insurance is getting more expensive. ANYthing that raises the cost of driving is a social good. Yes, it's a PITA for the driver, but Boo-EffyouSeeking-Hoo, we all need to help with the Climate.
Just today the Times has an article that the Gulf Stream is Running AMOC, the arctic will be in that Deepfreeze depicted in "The Day After Tomorrow" soon and we're still arguing about the price of gas.
It ought to be $10/gallon.
While celebrating economic pain is rather tedious and hair-shirt Leftist environmentalism is a path to political losses, at the same time indeed yes, under-pricing the cost (here the cost of risk) for an activity leads to having MORE of the activity than otherwise would occur which unless there is a significant economic benefit off-setting is generally bad
This is in the end analagous to home insurnace and public subsidy to insurance in flood plains that has led to overbuilding in those flood plains which is an economic burden even pre-climate change (and one would expect an enviro-economic burden in many such places where such insurance subsidy / under-pricing is doubtless leading to avoidable environmental habitat losses / absorption areas).
I think it's GREAT that auto insurance is getting more expensive
This is the US we're talking about. Not transit-dense Japan. Inability to afford private car transport is a real hardship for millions of Americans.
Net investment returns are down and can be expected given rate changes to be impacted by leverage compression. Whether this is explanatory or not needs a proper data analysis but is certainly a point that analytically would be relevant.
Vehicle thefts are way up over the past couple of years, so maybe that has something to do with it. On the other hand, a majority of vehicles are eventually recovered, so I'm not sure if there's actually much of a loss overall.
This is an interesting point. I suspect that vehicles recovered from theft are frequently in need of significant repair (or replacement of missing items like wheels and tires). So if thefts are significantly up, then there is a real component of loss that is not measured by accident rates and stolen vehicle replacements.
my vw is stick and i've heard that's basically a theft prevention device since most car thieves these days can't deal with manual transmissions
of course they can still steal my catalytic converter but that's still a lot cheaper than dealing with a chop-shopped car
I've owned three manual transmission cars, never been stolen though my current one was broken into a few years ago, I guess they gave up when they saw nothing in it but tattered snow brush and old school harder to hack dashboard.
How much of this is caused by an increasing number of olds who won't let go of their keys until you pry them out of their cold, dead hands? I have a friend in FL who damns this group to hell and back for the grief they give him on the road. Well, also for a number of ugly behviours, but that's the big one.
Would be interesting to see how many more cars are lost to floods and wild fires now. This could just be them factoring in the cost of global warming.
Actually the increased cost of insurance is due to the salary demands of the various TV spokescreatures of the competing companies - Flo and friends, sports stars, cockney lizards, emus, whales, etc... These people/animals are getting as much TV time as the supposedly featured entertainment.
I work for a personal injury lawyer on the east coast. There are SO many people driving without insurance. That means if you are injured in an accident, your insurance pays the property damage and any bodily injury claims. There are states (Virginia, New Hampshire) that don't require or keep insurance information. A cottage industry has sprung up that will get VA tags for cars not owned by VA residents, specifically to get around the auto insurance proof of payment most states have.
For property damage, if your car is older (think 2012 Toyota or 2007 Honda) and it gets hit, it's pretty much an automatic that the car is totaled. That's infinitely cheaper than repairing the car. Same goes for a car when the air bags deploy. It saves the insurance company $$ but does no favors to their customers. The Blue Book value of a 2007 Honda CRV is $500, which does not go far in buying new or used transportation.
Last but not least, when there are floods, fires, tornados or hurricanes and many vehicles are totaled, we all pay a price through higher rates.
Its infuriating. Ive been with Geico for years. Since at least 2010. We have been chugging along paying around 200 a month. My stepson turns 16, and we add him and his busted ass 1987 Toyota pickup to our policy. Liability only coverage, the absolute minimums. Our policy jumps up to 400$ a month.
He is working at McDonalds, and paying us 200$ a month to cover his insurance. Well, our renewal just came in. It jumped from 400$ a month to 775$. I thought it was a typo at first.
When I called them, they said that "WA has a cost of business increase of about 240$ over the 6 month policy." Thats ok I guess, but why is my kid being charged 500+ a month? Without him, its 189$. With him on, its 775$.
Who could afford that? We do OK and we absolutly cant. His dad added him to his insurance and thank god WA lets you exclude drivers. Otherwise we would be shit out of luck.
Also its not like we have expensive cars. We have a 2017 Tundra, a 2009 Honda Fit, and the 1987 Toyota truck. Two months of premiums are worth more than 2/3s of the fleet for crying out loud.
Insurance agent here: full disclosure, my income goes up because commissions are tied to premiums, but my day is rougher the more people are complaining about their premium increases. (From my standpoint, mild increases OK; large increases bad.)
Yes, insurers can allow for a combined ratio (losses plus expenses divided by premiums collected) a little over 100% as investment income will make up the difference. But combined ratios of 110% or 120% are unsustainable. Please note the time lag: a 10% rate increase Jan 1 will only be half realized July 1 and not fully realized until Jan of next year.
That said, the pricing pressure has all been in the physical damage portion (your collision coverage or the property damage liability for the guy you hit). Parts and labor have skyrocketed since the pandemic. Moreover, supply chain shortages have made repair times much longer. This has driven up rental reimbursement costs to the max limit (30 days typically for most insurers, but 45 for some vs. the usual repair time of 10-14 days.)
Another that said, there is a year lag with insurers loss statistics, and I think they are overshooting the recent decline in inflation (just as they undershot the loss reduction following the decline in driving). Because of this lag in actuarial data, insurance remains a perhaps a more boom-and-bust than most.