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Average prices for motor vehicle insurance rose 17.1% in May from a year earlier, according to the consumer’s price index.
That’s one of the largest annual increases of any consumer good or service, surpassed only by prices for margarine, frozen vegetables, motor vehicle repair and meals at schools and employee sites, according to data from the ICC.
Prices rose 2% between April and May alone.
About a third (31%) of US auto insurance customers say they’ve experienced an increase in rates in the past year, according to a study by J.D. Power.
The average consumer pays $2,014 a year in premiums for “full coverage” auto insurance, or nearly 3% of their income, according to 2023 Bankrate study. (These policies generally include liability and collision coverage.)
Many factors have conspired to increase the cost of car repairs, which is ultimately reflected in insurance prices, the economists said.
For one, many auto body shops and maintenance companies have closed during the pandemic, reducing their supply and increasing repair costs, said Mark Zandi, chief economist at Moody’s Analytics.
“The pandemic has been really disruptive to the auto repair business,” he said.
car accidents too increased in 2022.
Deaths from car accidents in the first quarter of 2022 were the highest in two decades, according to the US Department of Transportation. That dynamic puts financial pressure on insurers who receive an influx of auto damage insurance claims.
Auto insurers lost 12 cents for every dollar of customer premiums paid in 2022, on average, according to JD Power, the worst showing in over 20 years.
That left insurers few options other than to raise premiums, JD Power said. Customer satisfaction then plummeted, falling at its fastest rate in two decades, he added.
“They’ve really increased those premiums,” Zandi said. “At some point, and I think we’re getting there, people will refuse.”
Vehicle prices moderate after pandemic-era surge
In addition, the prices of the vehicles began rising at a rapid pace in the first half of 2021. Those high prices typically translate into high costs for a repair (and ultimately for insurers), economists said.
In fact, new and used vehicles were among the first consumer goods to experience high inflation finally taking hold in the US economy (and now appearing to be receding).
A “perfect storm” of pandemic-era factors such as tangled supply chains and shortages of auto parts like semiconductors has collided head-on with rising consumer demand, said Charlie Chesbrough, a senior economist at Cox Automotive.
The pace of vehicle sales in March, April and May of 2021 was the highest since the Great Recession, Chesbrough said. The US Federal Reserve had reduced borrowing costs to near zero in early 2020, and consumers built up a cash reserve during the pandemic by staying home and thanks to government relief.
In other words, many consumers wanted to buy cars that were in short supply, which pushed prices up.
Now, however, the dynamic has changed a bit.
Up to that point, the auto inventory has partially recovered.
The Fed has aggressively raised interest rates to control inflation, raising borrowing costs and reducing demand, Chesbrough said. Amid those higher fees, manufacturers are using more financial incentives to reduce transaction costs and consumer demand for juice, he added.
New vehicle prices have declined for two consecutive months, in April and May, according to the CPI. Although they are down, they remain 4.7% higher than a year ago.
CPI data indicates used car and truck prices rose in April and May, but economists believe they are poised for an imminent decline. Wholesale prices for used vehicles have fallen about 6% since March, according to the Manheim Used Vehicle Value Index.
Used car and truck prices have fallen about 4% in the past year, according to CPI data.