Masks are falling, COVID restrictions are falling, and motorists are hitting the road — and running straight into higher car insurance rates that show no signs of abating this year, economists say.
Pent-up demand for new and used cars, after a pandemic-reduced year of driving, is increasing risk for auto insurers, who pass the cost of that risk onto consumers, regardless of their accident history. and disasters.
While car insurers normally increase their annual rates by 3% each year, recent studies by Insurify and S&P Global Market Intelligence show that they have increased by 12% in 2021. Insurify projects that they will increase by another 5% This year.
“The U.S. auto insurance industry made an underwriting profit in 2020 for the first time in a decade as drivers stayed on the roads due to the pandemic,” said Hans Dau, founder of Mitchell Madison Group. , a business consulting firm. “Now, high general inflation and ever-higher increases in used and new car prices are clearly driving up claims costs for insurers as claims frequency and severity return to normal.”
Dau added that an interest rate hike expected in March, which will lead to losses in P&C insurers’ $2 trillion bond portfolios, is also “a significant factor contributing to higher premiums.” “.
“P&C insurers have three times more invested assets than premium income because they typically break even from underwriting and earn all of their profits on invested premiums,” Dau said.
Brian Marks, who teaches economics at the University of New Haven, said supply chain factors in the rate hikes include rising costs for computer chips, parts and labor. work, all of which remain in short supply. This pushes auto dealers to sell new vehicles above their MSRP, he said.
“Delays in repairs also mean the need for rental cars, if any, which has also seen a price hike,” Mr Marks said.
Scott Holeman, director of media relations for the Insurance Information Institute, an industry group known as Triple-I, said what looks like steep increases means rates are returning to normal.
“While some recent news reports might give the impression that auto insurance rates are skyrocketing, they are actually returning to pre-pandemic levels in the first quarter of 2022,” Holeman said. “Auto insurers returned about $14 billion to policyholders at the start of the pandemic because they expected fewer accidents during the economic lockdown.”
But he also cited Triple-I reports that crash frequency increased by 42%, crash severity increased by 43%, fatality rate increased by 26%, and replacement part costs increased. by 13% in the third quarter of 2021.
“We are seeing a rapid increase in the frequency and severity of accidents,” Mr. Holeman said. “These factors, combined with supply chain issues, have pushed insurers’ auto losses to levels above pre-pandemic levels.”
Other industry research confirms that fewer Americans drove in 2020, reducing crashes and keeping rates the same or lower than in previous years.
Rates rose again in 2021 as many drivers returned to the road after the pandemic shutdowns.
S&P Global Market Intelligence reported last month that auto insurance rates rose in November by 3% to 12% at several companies.
In March, April and May 2021, Insurify reported that Americans drove 32% more miles than during the same period the previous spring, although mileage did not quite return to 2019 levels.
“While the death rate decreased by 3% between spring 2020 and 2021, it remained 26% higher in 2021 than it was during the same period in 2019, suggesting that habits of reckless driving adopted during early pandemic shelter-in-place orders held up well beyond the onset of the pandemic,” Insurify said in the report.
Christine McDaniel, a senior researcher at George Mason University’s Mercatus Center free market think tank, said the Insurify study confirms that private auto insurance premiums have risen since last spring, after briefly falling. for certain drivers in December 2020.
“More people are driving under the influence, and incidents of road rage are also increasing,” Ms McDaniel said. “Road rage deaths and injuries doubled in 2021 compared to 2019. This means insurance companies are paying out more and more for each claim.”
A former deputy assistant secretary of the US Treasury, she added that continuing supply chain issues and inflated prices showed no signs of letting up.
“Auto parts are more expensive and take longer to get to them,” Ms McDaniel said. “So instead of an insurance company paying for your rental car for one to three days, it can now take weeks for that bumper, windshield, or new camera or electronic part to arrive.”