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Job growth, wage growth and business growth are all vibrant, and inflation has fallen sharply from 2022 highs. But despite improvement in consumer sentiment, it still remains sour.
One reason could be sticker shock from some highly visible prices – even as overall inflation has calmed. The cost of car insurance is a prime example.
Motor vehicle insurance increased 1.4 percent on a monthly basis in January alone and 20.6 percent over the previous year. Biggest jump since 1976, It has been a big hit for those driving around 272 million private and commercial vehicles registered in the country. And it has played a role in reducing the “mission accomplished” mood on inflation that was fueling markets at the start of the year.
According to recent private sector estimates, the average annual premium for full-coverage car insurance is $2,543 in 2024, compared to $2,014 in 2023 and $1,771 in 2022.
There are many reasons for this boom, but the main one is simple: Cars and trucks are more expensive now, so insuring them is also more expensive.
The cost of buying and owning a vehicle makes up a large portion (about 10 percent) of the overall consumer price index used to track U.S. inflation. From January 2020 to January 2024, the cost of a new vehicle increased by more than 20 percent, and the cost of used cars increased even more, while vehicle repairs increased by 32 percent overall. Shortages of computer chips and other supply-chain issues had a brutal impact on auto production and created bottlenecks that drove up purchase prices, which in many cases have not gone down.
In that context, the nearly 40 percent increase in auto insurance premiums from December 2019 “seems appropriate,” said Mark Zandi, chief economist at Moody's Analytics.
Insurers are for-profit companies in the business of covering the costs of a wide variety of events. So when their potential liabilities increase, companies say premiums also need to increase so that expenses do not outpace their revenues.
Most recently in the fourth quarter of 2022, Allstate suffered a $310 million net loss due to large underwriting losses, even though it increased premiums.
“The classic example is that, you know, a bumper used to be a cheap replacement part, and it's not that way anymore because you have advanced sensors — that makes it quite an expensive proposition,” RJ Lehman, a senior. said fellow at the International Center for Law and Economics, a non-partisan research center.
Companies have also reported more accidents and more serious accidents, leading to more bodily injury and property damage as well as higher medical payments – all of which insurers may be liable to cover depending on the breadth of the policy. Which impacts the net income margin.
“Insurers are agreeing to this,” said Sonu Varghese, macroeconomic strategist at financial firm Carson Group. “I'm sure there's some good old-fashioned margin protection going on, too.”
Another force that prompted insurers to raise premiums was the rapid increase in interest rates that the Federal Reserve plans to begin in 2022. To smooth returns and cash flows, insurers often reinvest their earnings. In 2021, insurers held a lot of assets that would lose value if short-term interest rates rose. When interest rates more than quadrupled, many insurers' balance sheets were decimated. (However, these insurers now have the advantage of reinvesting the leftover cash at new, higher rates.)
In recent months, trading activity on Wall Street and estimates from industry analysts indicate that the big insurers have turned things around.
Shares of Travelers and Allstate hit record highs after the companies announced another round of premium increases that are expected to cover billions of dollars more than annual claims. Shares of Progressive, known for its commercials featuring the fictional saleswoman Flo, have risen nearly 20 percent since the beginning of January, driven by similarly anticipated improvements in profit margins.
Many economists are not worried that auto insurance alone could play a leading role in resuming overall inflation, but it was a major reason price growth slowed last month more than analysts expected. (Motor vehicle insurance has recently contributed more than half a percentage point to the inflation index. Excluding it would leave overall inflation just half a percentage point away from the Federal Reserve's desired 2 percent pace.)
Samuel Rhines, a market economist and author who closely follows the balance sheets and pricing decisions of large companies, calls the surge in premiums “legitimate cost-covering,” in line with most analysts. Yet he said it came “with a little lag” on the back of most corporate value growth.
That gap has frustrated those who have already experienced price shocks. And it has drawn the attention of consumer watchdogs who see the recent increases as an opportunistic and particularly aggressive use of the “cost-plus” pricing model.
Critics, such as Hal Singer, an economist at the University of Utah, who calls recent increases in premiums “ridiculous,” note that consumers are legally required to buy car insurance and their ability to shop around for the best plan is limited. . All the major providers are raising premiums at roughly the same time, and telegraphing more to come.
According to an estimate from insurance comparison shopping website Insurify, the cost of car insurance will increase an additional 7 percent this year.
In the quarterly earnings call, Allstate executives said they haven't dealt with premium increases in many states, but they are sensitive to the risk of pushing customers too far — and potentially losing them to competitors that could raise rates. The first thing we can do is put a stop to the increase.
“As more states get into the right zone from a margin perspective, we would expect that the rates we need to charge in those states will go down,” Mario Rizzo, president of assets and liabilities, said on the call. “But charging a lower rate is a good thing from a retention perspective, and we will continue to focus on that.”
Several prominent voices at major banks are telling clients that although the wave of inflation ahead will be unsustainable, an overall disinflationary trend still remains – with relief for consumers and relief for those hoping that the Fed will do some tapering sometime this year. Time will reduce rates.
“While some further increases in insurance are likely, a sharp deceleration in year-over-year growth would seem inevitable,” David Kelly, chief global strategist at JPMorgan Asset Management, said in a recent note.
“Once it gets started,” Mr. Kelly said, “it should turn into the gift that keeps on giving.”
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