Why is auto insurance so expensive?

Why is auto insurance so expensive?

May 01, 2024

As part of our comprehensive financial planning approach, we offer to review our client’s property and casualty insurance policies to ensure they have appropriate coverages and deductibles, so we’ve seen firsthand over the past few years how much insurance premiums have increased.  We dug in to find out what’s behind these large premium increases and if rates will ever return to more palatable levels.

While inflation, as measured by the Consumer Price Index (CPI), increased about 3.5% compared to last year, the cost of motor vehicle insurance increased about 22% over the same period.  In fact, auto insurance premiums are about 46% higher than at the start of 2020.  And speaking of 2020, it’s clear that the pandemic has had an influence on the recent trajectory of auto premiums, but that’s not the whole story.

Following are some of the main factors affecting auto premiums recently:

  • Americans love SUVs, which are more expensive than sedans, but overall, vehicle prices are up. New technology has introduced exciting new features and made vehicles safer, but all the computers, sensors and cameras are expensive and contribute to higher replacement costs.  Pandemic-related supply chain issues caused severe shortages of these necessary components.  As supply-chain issues have eased, costs have receded somewhat but remained above pre-pandemic levels due to inflation.
  • Related to the above, more technology means more complexity in maintenance and repairs which translates into higher labor and parts expenses for consumers and insurers. This, of course, was also impacted by pandemic-era supply chain disruptions.
  • Despite new technology that makes vehicles safer, drivers are distracted. We probably all felt that drivers became more reckless during the pandemic, especially early on when there were fewer cars on the road.  Well, it turns out this perception has been borne out in data collected by the Insurance Institute for Highway Safety (IIHS).  Unfortunately, as the pandemic eased and traffic returned, driver behavior didn’t change.  Pedestrian fatalities are at their highest level in 40 years and, obviously, more accidents translates to more insurance claims.
  • Natural disasters like hurricanes and wildfires also contribute to the increase in premiums. Many common insurers in our area are national or even multi-national corporations, so wildfires in California or hurricanes in Florida could still impact our premiums here.  It has been reported that Hurricane Ian alone damaged or totaled almost 360,000 vehicles.  Increases in the number or severity of natural disasters will undoubtedly continue to have an impact on premiums, as will the matter of insurers leaving certain markets altogether, which is becoming more common.

So of the above factors causing higher premiums, what could change that could bring costs back down?  It’s possible that a quieter hurricane season, or fewer natural disasters overall, could help.  Most of the supply chain issues that we saw during the height of the pandemic have been resolved, so further reductions in inflation could ease the cost of parts, maintenance and labor.  Used car prices have also been declining recently, reducing the average cost of vehicles on the road, which should eventually filter through to lower premiums. 

Absent consumers changing their vehicle preferences dramatically, or their behavior while behind the wheel, it’s not likely we’ll see a significant reduction in auto premiums soon.  Despite this, it’s a good idea to shop your coverages in the marketplace every year or two to make sure you’re not paying too much.  Consider using a broker to do the shopping for you, and to help ensure you have appropriate coverages for your personal situation.







The views expressed represent an assessment of conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding investments, products, sectors or markets in general. 

The above statistics and/or commentary has been obtained from sources we believe are reliable, but we cannot guarantee their accuracy or completeness.  Past performance is no guarantee of future results. 

This is not a complete analysis of every material fact regarding any company, industry, or economic condition.  Due to shifting market conditions, all expressions of opinion are subject to change without notice.

The information contained in this document does not constitute the rendering of legal, accounting, or other professional advice or opinions on specific facts or matters.  Before implementing any ideas suggested here, consult with your advisor regarding your specific situation.

Talk to your financial advisor before acting on information in this document.