Why Auto Insurance Rates Are Out of Control (2024)

As my colleague Bob Kuttner has explained, yesterday’s inflation print was actually a tale of two readings. The overall figures showed only slight moderation in the rise in prices and a topline number that remains above the 2 percent target set by the Federal Reserve. But if you dig into the data, you can clearly see that a few sets of prices are really driving the lion’s share of the price acceleration, while most of the others are subdued. For example, food prices, which once had soared, have essentially been flat for the past few months, as consumers switch to cheaper brands and companies adjust prices to win them back.

The prices that are still rising rapidly have a lot to do with structural factors rather than an overheated economy that requires high interest rates to slow things down. In the case of rents and owner-occupied housing costs (known as imputed rent), supply constraints have caused price inflation, and if anything, that inflation is actually exacerbated by high interest rates, because they raise the cost of financing a home purchase. Simply put, the Fed is hurting, not helping, the efforts to bring down inflation with its interest rate policies.

But the real out-of-control price in the economy, relative to anything else, remains auto insurance. There’s been a 22.6 percent increase in car insurance costs over the past year, the fastest increase in half a century. (It should be noted that there’s a different reading for auto insurance in the personal consumption expenditures reading, which makes the price acceleration look much slower. So it goes.)

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Vehicle repair costs are also up, and it makes sense that those two readings would move together. If it costs more to fix your car, companies will likely charge more to insure it. Part of this reflects shifts in the auto industry and specifically the business model for auto dealerships. But there are a host of factors, including potentially the insurance companies’ price coordination and an attempt to make up lower earnings from the pandemic. Without federal legislation to remedy this, the patchy regulation of auto insurers will likely make this a continuing trend.

You may remember getting rebates during 2020 from your car insurance company; I know I did. When substantially fewer people drove during the lockdowns, accident claims dropped sharply. You probably won’t be surprised to know that these rebates, which were mandated by state laws but precisely calculated by the auto insurance companies themselves, were smaller than what customers deserved, according to consumer groups. “Excess premiums” in 2020 hit about $42 billion, but premium rebates amounted to only $13 billion.

We’re basically back to normal now as far as driving is concerned. Two things are decidedly not normal, however: the quality of driving on the road, and the complexity of repairing more technologically sophisticated cars. I don’t have to tell anyone who has sat behind the wheel during the past few years that you’re driving with a bunch of maniacs, and if you don’t think so, you’re the maniac. Traffic deaths hit a 16-year high in 2021, and accidents per one million inhabitants have consistently risen. Auto theft was also up in the past few years, though it’s coming down now.

Even if the potential costs are high, the actual costs to insurance companies appear to be coming down.

The second factor is that vehicles are harder and more expensive to fix. Part of this is supply chain shortages for auto parts and manpower, but we’ve worked through the majority of those. There are just a lot of computer chips and sensors on vehicles nowadays, and you need a good deal of skill to figure out how to repair them.

This intersects with the fact that service is a large part of how auto dealerships not only make their money but also hook customers into sticking with them. The rise of electric vehicles has broken a lot of this business model: They don’t need oil changes (though sometimes dealers will sell people an oil change package on EVs anyway) or the regular maintenance that gas-powered vehicles require. That means fewer recurring costs for dealers on EVs, which can only be made up if they overcharge for repairs. And that creates the vicious circle, where higher repair costs lead to higher insurance costs.

An additional issue is climate change, which has created more extreme weather events like hurricanes and floods. Like any other piece of property, cars can be totaled in these events. That’s not going to change, and will probably permanently push up the price level for all insurance (home insurance in particular).

But even if the potential costs are high, the actual costs to insurance companies appear to be coming down, at least according to insurance industry earnings reports. Geico, a leading car insurance company owned by Warren Buffett’s Berkshire Hathaway, is on a path to record profits, thanks to both higher premiums and fewer claims. Profits are way up for Allstate and Progressive as well. That illogical scenario has triggered interest from economists like Hal Singer of the University of Utah and EconOne.

At The New York Times, Emily Flitter argues that it’s in large part a paperwork issue. State insurance regulators govern auto insurance rates, and they require a large amount of data to justify increases. Insurers submitted a flurry of rate requests in 2021, as people came out of lockdown and started crashing into each other, and a backlog emerged. This has led some insurers to duck out of the market, and fewer choices have led to higher premiums, according to this reading.

But Singer argues that the industry was actually coordinating these increases, essentially jamming regulators to move prices upward. In addition, it does look like insurance companies are attempting to make up for losses during the previous few years. One industry analyst claims that there was $33 billion in losses in 2022 and $17 billion in 2023.

Singer said on Wednesday that this assumes some natural right to profit. “Pricing in competitive markets—and this clearly is not one—is tethered to current marginal costs. No company is guaranteed profits across all years,” he wrote.

This could also be another area where Federal Reserve interest increases may have worsened the problem. Insurance companies invest premiums as “float” before they have to pay anything back out in claims. When interest rates began to jump, insurance companies were caught short with investments in long-term securities that ended up losing money. In other words, industry losses have in one sense nothing to do with higher costs for auto repairs, but rather with their own bad investment strategies.

Those investments have largely now been shifted into higher-yield products, which calls into question the need for these massive rate hikes. And it explains why Geico and other companies are enjoying record profits right now.

Adding to this disconnect is the fact that auto insurance companies are tracking you and monitoring your driving habits. Internet-enabled features in newer automobiles collect data that is pushed off to data brokers and eventually insurance companies. This could lead to a new business model of “usage-based insurance,” where the price is tied to driving behavior. Prices based on risk may sound fair, but the surveillance can be undisclosed, leading to people perceived as bad drivers getting skyrocketing increases without knowing it’s because they’ve been spied on.

There’s essentially no regulation right now on auto data collection, and some lawmakers want to see a framework put in place. “Automakers face few, if any, limitations on the collection, use, and disclosure of this data,” wrote Sen. Ed Markey (D-MA) to the Federal Trade Commission. “Consumers are often left in the dark.”

None of the factors behind the rising cost of auto insurance have anything to do with government spending or any of the other usual suspects. But it does appear that Fed interest rate hikes are hurting, or at least did in the past. And there’s at least some reason to suspect that the auto insurers are in pretty good shape despite continuing to raise premiums. It goes to show that monitoring corporate behavior and personal privacy means more to a fair price than tiresome debates about whether the economy is too hot.

David Dayen

David Dayen is the Prospect’s executive editor. His work has appeared in The Intercept, The New Republic, HuffPost, The Washington Post, the Los Angeles Times, and more. His most recent book is ‘Monopolized: Life in the Age of Corporate Power.’

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