Why Are Car Insurance Rates Still Going Up?

Despite driving well–yielding politely, obeying every stop sign, and racking no tickets or accidents–your auto insurance premiums seem to have steadily risen in recent years. It’s not just you though. Since about 2012, rates to insure vehicles have gone up in all states and for all drivers, even including those with spotless driving records and no claims.

And not by negligible amounts. Since 2012, the consumer price index (CPI) for auto insurance has gone up by 21.5%, compared with a rise in the overall consumer price index of 4.5% over that same five-year period. It’s the largest five-year growth of auto insurance costs since the early 1990s, when costs grew by about 30% between 1989 and 1993.

The Profit Challenge

The insurers aren’t raising rates for the sake of just charging you more–there are rules against that, actually. Instead, the driving force in the upward march in premiums is an auto insurance industry that’s been finding it increasingly difficult to sustain healthy profit margins.

Of the top five insurers, only GEICO and Progressive have managed to maintain profits, and the amounts by which they’re in the black have trended downward over the last seven years. It’s even worse for some other insurers  like State Farm. The single largest auto insurer in the country has seen its revenue from premiums rise by 26% since 2010, but also suffer a 35% increase in the cost of covering the cost of claims in the same time period.

Graph shows profit margins for largest auto insurers since 2010, Source: SNL Financial

Declining Profit Margins Have Characterized the Auto Insurance Industry Since 2010

Another way to look at these numbers is through the combined loss ratio: the ratio between underwriting losses (as well as all other business expenses) and written premiums.  In 2010, the average direct combined loss ratio was 99.7% amongst the nation’s ten largest insurance companies meaning they were just barely making a profit off auto insurance premiums. In 2016, the ratio ballooned to a whopping 107.1% average, meaning the major insurers were losing 7% more than earning last year.

So what’s causing the insurers to lose so much money?

 

2 Root Causes For The Rises

Two key factors are battering the industry, which in turn is passing along much of the pain to their customers:

 

More costly accidents. The severity of car accidents has been trending upwards since 2011. Progressive, for example, reports that the cost per claim rose by 5% from the first nine months of 2016 compared with the same period in 2015.

Contributing to that trend have been a steady rise in the number of fatal car accidents; the National Safety Council has said, once all data is in, fatal accidents are expected to have risen by some 6% year in 2016, to hit the highest number of total of fatalities since 2007.

Fatal accidents can cost the insurance company upwards of $6 million. Medical care in the aftermath of accidents is also becoming more costly. The cost of  medical services has jumped by 12% since 2012,  according to the BLS.

It’s no surprise, perhaps, that rate hikes have been particularly steep in states with mandatory personal injury protection. That especially the case in Michigan, which has unlimited PIP, but it also applies in the other PIP-mandatory states–Florida, New York, Kentucky, Utah, Pennsylvania and Oregon–all of which have experienced above-average rate increases since 2012 according to Ratefilings.com.

 

A Decline In Investment Revenue. Insurance companies also hold large investment portfolios, mostly in bonds, from which they earn income. Traditionally, in bad underwriting years, they could turn to healthy returns from those portfolios to offset losses. Since the financial crisis though, interest rates have been historically low and the well of investment income has become shallower.

Graph shows investment income for largest auto insurers since 2007

Investment income has declined or stagnated since 2007 after adjusting for inflation

Beside a spike in 2014, investment income growth has either declined or stayed stagnant since 2007–the year before the financial crisis. Without that source of income to reliably turn to, there has been even greater pressure on the insurers to raise rates.

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