Car Insurance Premiums: Here’s Why They Keep Rising

By Russ Heaps 10/11/2022 12:38pm

Cash resting on auto insurance policy
  • Higher car prices helped push up car insurance rates
  • Hurricane Ian and other extreme weather contributed to increases
  • Spike in catalytic converter and car thefts
  • Rate hikes vary by state and insurer
  • When you maintain good credit, it helps auto insurance rates stay low

If you feel like the price of everything skyrocketed over the past year, you’re not alone. Prices across the vast array of consumer goods have relentlessly ticked upward. Sadly, your car insurance premiums haven’t escaped this trend. However, you may not know it yet because rate hikes usually hit when you renew your policy.

As with the economy in general, several factors are conspiring to push the cost of insuring your car ever higher. In effect, it’s a perfect storm of causes pressuring insurance rates higher. Here, we will provide evidence for rising rates and reveal many of the responsible culprits. We’ll also do a bit of crystal-ball gazing to help prepare you for what is coming and provide a few tips for minimizing the impact of rising insurance premiums.

Let’s do some sleuthing and see what’s going on.

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Is Car Insurance Getting More Expensive?

In a word, yes. However, rate hikes are state-by-state and insurance carrier-by-carrier. As the smoke clears, though, increases will touch nearly every driver. Bankrate recently reported that auto insurance rates are increasing by an average of 4.9% nationally.

Bankrate also reports that the average cost for full coverage car insurance at the time of this writing is $1,771. For minimum coverage, the average drops to $545. Applying that 4.9% increase to those numbers brings the average annual rate for full coverage to $1,858 and $572 for minimum coverage — but that’s not the end of it. Read on to learn how much more car insurance costs are likely to increase.

What Is Full Coverage for Car Insurance?

Each insurance company uses its own definition of what full coverage is. However, most agree it includes collision, comprehensive, bodily injury liability, and property damage liability. Some companies may also include personal injury protection (PIP), uninsured motorist, and other coverage in their “full” definition.

What Is Minimum Coverage for Car Insurance?

Minimum coverage can vary depending on your state and what is required to drive legally. Sometimes it’s just bodily injury liability and property damage liability.

RELATED: Penalties for Driving Without Car Insurance by State

Why Is My Car Insurance Going Up?

Although it might seem the rising cost of new and used cars fully explains increasing car insurance trends, several factors are responsible. We contacted a data-gathering organization, the Insurance Information Institute (Triple-I), for its take on spiking car insurance costs. We were surprised by some of what we learned.

With so many influences in play, trying to pin down exactly where the problem begins is tricky. All the issues are related in some way. Consequently, it becomes “the chicken or the egg” when determining what causes what. However, we list several factors below.

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1. Higher Car Prices

Prices for new cars and used cars are abnormally high. Data from Kelley Blue Book parent Cox Automotive shows the average transaction price for new vehicles in August 2022 rose 10.8% compared with August 2021. The Kelley Blue Book new-vehicle average transaction price in the U.S. increased to $48,301, which is $4,712 more than 12 months before.

Used car prices shot up, as well. Kelley Blue Book closely monitors the prices buyers are paying for used cars. There’s a bit of magic involved in comparing year-over-year prices. It’s not quite an exact science. The good news is that year-over-year used car prices inched down measurably from March until June of 2022. However, they are still higher than a year ago by more than 11%.

Summary: The economics of these staggering increases as they apply to insurance costs are pretty basic. As vehicle prices rise, so does the cost to insure them.

2. Higher Cost Car Replacement Parts

Increased demand (see below), breakdowns in the supply chain, and escalating costs of metals are the “hat trick” of replacement parts’ soaring costs. These costs add to the expense of repairing a damaged car pushing insurance settlements upward. By some estimates, car parts’ costs are up somewhere between 7% and 20% this year alone.

However, the issue doesn’t end with the uptick in the cost of common replacement parts. Today’s new cars are loaded with evermore sophisticated technologies and systems. Replacing high-tech components adds another level of cost to the repair equation.

Summary: Costs for car replacement parts spiked this year, adding to insurance carrier losses.

3. Rise in Car Crashes and Fatalities

According to Triple-I, the second quarter of 2022 was the fourth consecutive quarter of increasing traffic accidents, injuries, and fatalities. More claims translate into greater losses for insurance carriers. Furthermore, as the frequency and severity of traffic accidents multiply, so does the involvement of attorneys. In fact, there has been a big spike in liability losses.

Dale Porfilio, the chief insurance officer for Insurance Information Institute, said more lawsuits mean higher insurance payouts and increased premiums. “Increased liability losses may reflect increased litigation as courts re-open with the waning of the COVID-19 pandemic,” he said.

Summary: Accidents continue to grow in frequency and severity, resulting in more litigation and higher liability settlements.

4. Comprehensive Claims Are Rising

Your comprehensive insurance covers losses from natural disasters like Hurricane Ian, break-ins, vandalism, and thefts. For example, the claims for catalytic converter thefts are way up nationwide. Each catalytic converter contains between $20 and $240 of rare metals, making them a popular target for thieves. Replacing the stolen converter and repairing all of the damage caused by a thief stealing it can add up to an insurance claim of up to $3,000 or more.

Summary: Thefts and other comprehensive claims are on the rise.

5. A Broken Supply Chain

Choke points in the supply chain don’t directly impact insurance premiums. However, they do affect the price of new cars and replacement car parts.

It doesn’t matter much which point in the supply chain you study; things aren’t running smoothly. There are loads of reasons for this — a depleted workforce from the COVID-19 pandemic, high fuel costs, and shifting demand. Plus, too much reliance on “just in time” inventory management, leaving many industries victim to a supply stoppage of more than a few days. Many suppliers were down for months, not days. It’s been a game of catch-up ever since.

Currently, there’s a shortage of truck drivers, dock workers, and freight ships.

Summary: You can at least partially blame high car prices and expensive replacement parts on a busted supply chain.

Will Your Car Insurance Premium Go Up?

The news here isn’t good. For the past two years, the ratio of money auto insurance carriers pay out in claims versus what they earn in premiums has been growing. According to data from Insurance Information Institute, in 2020, on average, car insurers paid out roughly $0.93 for every premium dollar. That flipped to paying out $1.02 for each premium dollar in 2021. For the second quarter of 2022, that ratio deteriorated even more to $1.05 paid in claims for every premium dollar received.

Based on recent industry results, Triple-I projects auto insurance rates will need to increase another 5% to 10% in the next year.

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5 Steps to Lower Your Car Insurance Premium

Just because you are probably in line for a hefty rate boost in the next year doesn’t mean you don’t have options. You can take steps to reduce your premium even in the face of looming increases.

  1. Shop around: Some insurance companies are simply more expensive than others. In this market, you need to shave costs wherever you can. Do some research. There’s probably a better deal out there.
  2. Bundle your coverage: Many insurers offer discounts to customers if they have more than one policy with the company. Home and auto coverage are two common policies most companies will bundle and discount.
  3. Increase the deductible: Setting a higher deductible for claims will almost always result in a lower premium. Discuss it with your insurance company to determine a deductible that you can afford to pay out while lowering your rate at the same time.
  4. Reduce coverage: This is a suggestion aimed at drivers with older cars. If your vehicle is older and paid off, you can consider lowering or eliminating the collision coverage. The same goes for comprehensive coverage. Research your car’s current market value. If the book value is low, you may be better off putting those premiums into a savings account for a new ride.
  5. Maintain good credit: Insurance companies look at credit scores when evaluating a driver’s risk. A low credit score alerts an insurance underwriter that it may be more likely you will file claims. This is particularly true if you have a low- or no-deductible policy.