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.
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?
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.
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
While you may associate bad weather more closely with homeowners insurance, weather disasters like hail storms and floods end up costing millions and sometimes billions in car damages which auto insurers cover through comprehensive insurance. Just between 2010 and 2013, the average property damage caused by floods, hail and tornadoes (the largest weather contributors of car damage) was $9.5 billion a year according to NOAA data I analyzed.
The insurance companies are indeed paying out (and losing) more for comprehensive claims than they have in over a decade. Before 2012, the average LAE ratio (combined ratio without operating expenses) was about 60% but has averaged around 67% since 2012 according to data from SNL Financial.
The Road Ahead
Unfortunately, auto insurance rate hikes likely won’t moderate until profits rise. And returning to strong profits will require some luck, changes in some broader economic trends, and perhaps a little help from technology.
In terms of luck, there will need to be a mild storm season, with no major hurricanes at all. Hurricane Matthew cost the insurers billions in 2016, so another powerful hurricane this year can have a similar effect. The number of hail storms and floods will also have to keep to the lower side so the insurers aren’t faced with a barrage of comprehensive claims.
In terms of economics, there is going to need to be a reduction in the number of accidents on the road, which is usually a function of the number of people driving. That number has been rising--by 5% between 2011 and 2016, for example--in large parts because it has become cheaper to be a car owner. The CPI for buying a used or new car has only increased by 6.3% since 2007 while the price of motor fuel has dropped by 21% over that time. While a rise in gas costs would hit most households hard, it might actually serve to reduce their car insurance costs, by discouraging driving, and thus probably reducing fatal accidents.
One possible positive disruptor as far as accidents go is the rollout of self-automated cars. The NHTSA once found that 93% of car accidents are a result of human error; if a computer can more safely drive your car for you (a big if at the moment, admittedly), we may experience dramatically fewer accidents on roads. However, self-driver vehicles aren’t expected to be fully be implemented until 2030, and how much, if at all, they’ll make roads safer will become clearer only as that year approaches.
Written by Craig Casazza for Forbes Magazine 5/23/2017