If your car broke down two years ago, it probably became a bigger problem than you expected.
A confluence of forces was to blame: the Covid pandemic disrupted supply chains, driving used car prices to record levels and making it difficult to source parts; unpracticed drivers leaving lockdowns caused more serious accidents; and technological advances, such as motion sensors, made even the simplest parts, such as a fender or tire, expensive to replace.
Since then, things have gotten better for car owners, except when it comes to insurance bills. Auto insurers continue to raise prices sharply: The price of motor vehicle insurance rose more than 22 percent in the year through March, the fastest pace since the 1970s, according to the Bureau of Labor Statistics. According to calculations by the Insurance Information Institute, a trade group, the average 12-month premium for auto insurance was $1,280 in 2023, the most recent figures for the industry.
Year-on-year variation in consumer price index measures
That has made auto insurance a leading factor in preventing overall inflation from cooling more quickly, which could force the Federal Reserve to keep interest rates higher for longer, even as prices for many other Essential goods and services have slowed.
Geico recently reported a big jump in quarterly profits due to higher premiums and fewer customer complaints. The stock prices of other large auto insurers, such as Allstate and Progressive, have outpaced the overall market’s rise this year.
that has attracted scrutiny of economists. A key reason auto insurance costs are rising so rapidly right now has to do with the way the industry is regulated.
How does insurance regulation work?
Insurers are regulated by the states, not the federal government. In all 50 states, insurance companies must follow specific rules about how and when they can increase the price of their policies.
Each state’s laws are broadly similar and require insurers to ask regulators for permission to raise prices. Insurers have to demonstrate, with supporting data, that the increase is necessary and that they will not make too large profits on the revalued policies. This request, known in the industry as “rate submission,” involves complicated procedures that can take weeks or months to resolve.
The data should include an analysis of loss trends over the past several years, as well as projections of replacement costs and profits. If insurers are deemed to be making too much profit, regulators can force them to return money to customers.
The threat to return the money is not in vain. At the height of the pandemic lockdowns in 2020, when many cars sat idle, insurers returned nearly $13 billion to customers through dividends, refund checks and premium reductions for policy renewals, according to the agency. AM Best insurance rating.
California was one of the busiest states, with insurers returning $3.2 billion to customers in 2020.
Ricardo Lara, the state’s insurance commissioner, “directed the department to do a very detailed analysis to make sure drivers were not overcharged,” said Michael Soller, a spokesman for the California Department of Insurance. But starting in late 2021, the state became the poster child for a new problem: an epic backlog of requests from insurers to raise prices.
How a massive paperwork jam explains rising prices.
When the pandemic shut down most economic activity, it ruined insurers’ ability to use the past to predict the future. For months they were frozen. They did not submit new rate requests to regulators for a period, until they did so, all at once, in the second half of 2021.
Car and parts prices were rising and drivers were returning to the roads and crashing left and right after a break from driving.
“It went from this period of incredible profitability to incredible losses in the blink of an eye,” said Tim Zawacki, an insurance analyst at S&P Global Market Intelligence. No company was willing to take a risk by offering lower premiums in the hope of winning new business, he said.
“Everyone was together to significantly push for rate increases.”
In California, the most populous state in the United States, insurers were being hit by costly claims.
But the state regulator didn’t begin approving insurers’ requests to raise rates until near the end of 2022. The backlog grew so long that the average wait time for approvals was longer (several months) than for six-year policies. months that insurers wanted to sell.
“When state regulators delay or prevent companies from accurately pricing insurance, insurers may not be able to absorb the costs,” said Neil Alldredge, president of the National Association of Mutual Insurance Companies, a trade group. which represents many home and auto insurers. The restriction may lead insurers to leave some states or halt some lines of business, he added. “Inefficient regulatory environments in states like California, New Jersey and New York, combined with inflation and increasing catastrophic losses, have left consumers with fewer insurer choices and higher costs,” he said.
California remains the slowest state in the continental United States when it comes to submitting auto insurance rates, taking an average of 219 days to approve a price proposal for a personal auto policy, according to S&P data provided by Zawacki .
“We fight for consumers by analyzing all data, not just what insurance companies give us,” said Soller, a spokesperson for the California Department of Insurance.
S&P’s analysis showed that New Jersey, the 11th most populous state, had the sixth-longest wait time, while New York, with the fourth-largest population, had the seventh-longest wait time.
“The department conducts a thorough review of requests to modify rates or rating systems to ensure compliance with New Jersey law,” said Dawn Thomas, spokesperson for the New Jersey Department of Banking and Insurance.
Ms Thomas said the regulator needed to ensure each proposed premium increase was “reasonable, appropriate and not unfairly discriminatory” and that sometimes insurers’ requests needed to be challenged or denied.
A spokeswoman for the New York regulator declined to comment.
When will the jam be resolved?
Shortly before the pandemic, the umbrella organization for state insurance regulators, the National Association of Insurance Commissioners, formed a team of data scientists to help regulators deal with their rate filings, which have become more complicated in recent years.
The data team became fully operational in 2021 and its mission now is to help speed up the review process: 37 states have signed up to use it.
This month, during a call with analysts to discuss Allstate’s earnings, company representatives said they had recently reopened their auto insurance business in California after getting permission to charge higher rates. The company still wanted to raise prices in other states.
In New York and New Jersey, for example, “even with the rate approvals we got late last year, we still don’t feel like we’re at the appropriate rate level to want to grow in those two states,” Mario said. Rizzo, president of Allstate’s property casualty business.
How much will premiums go up?
In 2021, insurers’ personal auto businesses began to post losses. According to AM Best analyst David Blades, the industry lost $4 billion in 2021, $33 billion in 2022, and approximately $17 billion last year.
According to Dale Porfilio, director of insurance at the Insurance Information Institute, the trade group, many companies still need to raise prices to make up for those bad years.
Last year, insurers raised auto premiums by 14 percent, the largest increase in more than 15 years. Porfilio’s best guess is that premiums this year will increase another 13 percent.
“It will take time for every company to get their rates to the level they want,” he said.