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Auto insurance inflationary rate increase remains above total inflation

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Insurance | Market Trends
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The inflationary rate of auto insurance climbed by 19.2% from November 2022 to November 2023, continuing to be above the total inflation rate of 3.1%, and contributed 0.5 percentage points to the rate, according to the latest Consumer Price Index (CPI) data from the U.S. Bureau of Labor Statistic (BLS).

In November, auto insurance rose by 1% following a 1.9% increase in October.

Cambridge Mobile Telematics Senior Vice President Ryan McMahon noted on social media that the increase in insurance rates represents a significant portion of overall inflation.

“The impact of risk in auto insurance [has] always lagged behind in CPI data as insurers use trend data to file, and then seek approval for rate changes from regulators,” he wrote. “That said, the major deterioration in road safety since 2020 continues to show up as a contributor to inflation.”

For comparison, he noted the following in CPI category weights and changes:

    • Shelter index: 6.5% increase, CPI Weight: 34.967
    • Food index: 2.9% increase, CPI Weight: 13.420
    • Energy index: -5.4% change, CPI Weight: 6.963
    • Personal Care: 5.2% increase, CPI Weight: 2.218

The Associated Press reported last week that most economists predict inflation should fall closer to the Federal Reserve’s 2% target by the end of next year, though following a bumpy while price increases continue to slow.

“Wages and rental prices, among other items, are now increasing more gradually… in some areas, notably the prices of physical goods, many items are actually becoming cheaper rather than just rising more slowly,” the AP reports.

“Slower wage growth should ease inflationary pressures because employers won’t have to raise prices so much to cover their labor costs.”

However, the AP also noted that Fed officials often point to low inflation expectations by consumers as “a reason why they may succeed in pulling off a rare ‘soft landing,’ in which inflation would fall back to 2%, without causing a sharp recession.”

Fed Chair Jerome Powell said earlier this month, according to the AP, that the Fed’s interest-rate-setting committee “is moving forward carefully” regarding cutting interest rates.

Speaking at Spelman College in Atlanta, Powell said, “It would be premature to conclude with confidence” that the Fed has raised its benchmark interest rate high enough to fully defeat inflation, the AP reports.

Based on research by Christopher Thornberg, Beacon Economics founding partner and economist, the real issue is more demand than supply driving up costs, such as a limited number of new cars making it to market, which he noted served as leverage for the United Auto Workers (UAW) union in its strike against the Detroit 3.

When he spoke during this year’s MSO Symposium in October, Thornberg predicted that inflation will stay above target as the Fed continues to tighten in 2024 causing public deficits to remain unsustainable, asset prices likely to sag again, and economic growth to slow.

The most recent insurance rate increases were approved in California, New York, and New Jersey where Allstate hiked prices by double-digit percentages.

CEO and President Tom Wilson said earlier this month that Allstate would drop insurance customers in those states if rates weren’t increased.

California approved a 30% increase, New York a 14.66% increase and New Jersey a 20% increase. The carrier said new rates will be implemented this month with effective dates through February.

Wilson said the cost to replace cars has lowered from what it was during the pandemic but the cost to cover bodily injury, car repair, and litigation remains above general inflation.

Allstate will likely have to increase prices again next year depending on the growth of costs, he said.

According to a new report from the California State Legislative Analyst’s Office (LAO), state funding from gas taxes will drop by nearly $6 billion in the next decade because of electric vehicle (EV) rules and other climate programs in the state, which will likely result in a decline in highway conditions. This is noteworthy in that as highway conditions decline, insurance claims, and thus costs, may increase.

California has conducted several pilot programs to study options for implementing a road charge, including through usage-based insurance (UBI). The federally funded “Four-Phase Demonstration Pilot” also tested the collection of a road charge through ridesharing, EV charging stations/pay-at-the-pump systems, and autonomous vehicles (AVs). The pilot was completed by Caltrans in 2022. The results showed collecting the charges on those technologies could prove successful, according to the LAO.

Insurance impacts on inflation aren’t new. According to a recent Insurance Information Institute (Triple-I) study, social and economic inflation caused U.S. P&C combined liability claim payouts to be $96 billion to $105 billion higher between 2013 and 2022 (social inflation means how insurance claim payouts exceed the CPI).

“For both personal and commercial auto liability lines, social inflation was the main source of increasing inflation before 2021,” the study said. “For 2021 and later, increasing inflation came from a combination of economic inflation and social inflation. There is evidence of a slowdown in claims payments in calendar years 2020 and 2021, likely triggered by slowdowns in court cases and other effects of the pandemic. The average annual impact of increasing inflation is approximately 0.6% per year for personal auto liability and between 2.3% and 2.7% for commercial auto liability.”


Featured image credit: Khanchit Khirisutchalual/iStock

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