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Inflation, ongoing supply chain problems and costly car accidents will lead to higher car insurance costs in 2023.
During the height of the pandemic, when driving declined sharply, the number of accidents and claims fell as well. Now drivers are back on the road and the resulting accidents are costing much more in auto insurance claims thanks to more expensive parts, labor and medical bills.
The rising cost of auto insurance is the main trend auto insurance buyers can expect to see in 2023, and these are the major contributing factors.
Inflation catapults car insurance costs higher
The consumer price index (CPI) saw an increase of 7.7% for the 12-month period ending October 2022. The CPI saw its biggest 12-month increase in 40 years, in June 2022, when the CPI increased by 9.1% rose.
The cost of food, housing, energy and other everyday items, including car insurance, are evaluated for the CPI, which helps measure inflation and track its rate of change over time.
Auto insurance costs rose 1.7% from September to October 2022, the seventh consecutive month in a row. And according to CPI data, auto insurance prices are up a whopping 12.9% year over year. Compared to September 2020, the cost of car insurance has increased by a whopping 19.9%.
A new report from the American Property Casualty Insurance Association (APCIA), a trade group for property and casualty insurers, examined auto insurance companies’ struggles with inflation. The APCIA says insurance claims costs are rising faster than CPI and rising faster than auto insurance companies. As auto insurance companies feel behind, they expect to pursue more rate increases in 2023 to catch up.
“One of the biggest concerns consumers will face in 2023 is the unrelenting rate of auto insurance growth,” said Douglas Heller, director of insurance at the Consumer Federation of America.
Auto insurance company rate increases have already been approved or submitted to state regulatory departments, but they’re only beginning to roll out. Heller expects drivers to see significant rate increases over the next six to nine months as their policies renew — or if they purchase new auto insurance.
Serious car accidents lead to expensive medical claims
People are on the road again and driving more than ever. Federal Highway Administration data shows that 43.2 billion kilometers were traveled by vehicles in the first half of 2022, an increase of 2.8% over the same period in 2021.
More miles driven gives drivers more chance to crash. National Highway Traffic Safety Administration (NHTSA) estimates for the first quarter (January to March) of 2022 show 9,560 deaths in auto accidents, the highest number of fatalities in the first quarter of a year since 2002. That’s an increase of 7% in fatalities compared to 2021.
The APCIA points out in its report that the frequency of injury claims has decreased by almost 25% in recent years, but the severity of injuries has increased by almost 40%. That makes insurance payouts for personal injury claims higher, and this will eventually be passed on to all drivers in the form of car insurance increases.
The average cost per collision claim (known as collision claim severity) reached $5,743 in the first quarter of 2022, according to the APCIA. That is a new record and 36.5% higher than in the first quarter of 2020. Meanwhile, auto insurance companies increased auto insurance rates by just 4.6%.
There is a glimmer of hope that the trend of road fatalities will reverse. NHTSA estimates for the second quarter of 2022 (April to June) show a 4.9% reduction in fatal car crashes compared to 2021. If the number of serious crashes starts to decline, there is a chance that future auto insurance increases are being reduced—but they’re still on the way.
Auto repair costs continue to rise
Car accidents also come with property damage claims for the broken down vehicles. Inflation has also hit this area hard, with high costs for parts and labor. Ongoing supply chain problems make aftermarket and original equipment manufacturer (OEM) parts hard to find and cause a serious backlog in repair shops, which only adds to the cost of auto insurance claims.
A report from Enterprise Rent-a-Car tracked how long rental cars were used by drivers waiting for their car to be repaired after an accident. Enterprise determined that the average time car owners waited for collision repairs in the second quarter of 2022 was 18.2 days, 4.5 days more than last year.
Repair times have increased significantly, putting additional pressure on insurance companies to raise auto insurance rates, said Rich Attanasio, senior director at AM Best, a credit rating and data analytics provider specializing in the insurance industry.
“Many personal auto insurers continue to pursue rate increases in response to worsening claims costs, which are driven by several factors: the higher number of fatalities, increases in the cost to repair newer vehicles, higher used car prices, supply chain and labor market challenges, and rising medical costs,” says Attanasio.
Mark Friedlander, a spokesperson for the Insurance Information Institute, says: “Personal auto insurance premium growth has remained relatively flat this year, despite significant increases in the consumer price index (CPI), vehicle prices and the cost of replacement auto parts.”
Other factors Friedlander notes that are pressuring auto insurance companies to raise rates include higher used vehicle values, higher auto repair costs and more extensive claims for catalytic converter theft.
Lawsuits lead to large payouts and then rate hikes
A major concern for auto insurance companies in 2023 will be claims overpayments due to lawsuits. A study by the Insurance Research Council found that having attorneys involved in auto insurance claims involving injuries is associated with higher claim costs and settlement delays.
The APCIA report shows that litigation claims are increasing at an unprecedented rate. This includes an increase in verdicts and some with exceptionally high jury awards, including multibillion-dollar personal injury verdicts. The concern for auto insurance companies is that these major lawsuits will set new precedents that will fuel “lawsuit inflation.”
The Insurance Information Institute has a briefing on social inflation and its consequences for car insurers. It explains how social inflation refers to the impact of rising litigation costs on insurance companies’ claims payouts, their loss ratios (how much an insurance company pays for claims compared to how much they received in premiums) and, ultimately, how much we as policyholders pay for the car insurance.
A research paper by the Insurance Information Institute and the Casualty Actuarial Society found that social inflation increased commercial auto liability claims by more than $20 billion between 2010 and 2019. There is some evidence that similar trends are emerging in other industries, with insurance companies fearing it will spill over into personal auto insurance.
High court costs and judgment costs affecting auto insurance companies will be passed on to drivers in the form of higher auto insurance costs.
All in all, the bill comes at multiple costs, and auto insurance companies always try to pass the cost on to customers.
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