Employment growth, wage growth and business growth are all buoyant, and inflation has fallen sharply from the highs of 2022. But consumer sentiment, while improving, is still sharp.
One reason may be sticker shock from some highly visible prices — even when overall inflation has calmed. The cost of car insurance is a prime example.
Auto insurance rose 1.4% month-on-month in January alone and is up 20.6% over the past year, the biggest jump since 1976. It was a huge success for those who drive the approximately 272 million private and commercial vehicles registered in the country. And it played a role in softening the “mission accomplished” sentiment about inflation that was rising in markets at the start of the year.
According to a recent private sector estimate, the average annual premium for comprehensive auto insurance coverage in 2024 is $2,543, up from $2,014 in 2023 and $1,771 in 2022.
This rise has a variety of causes, but the central one is simple: Cars and trucks are more expensive now, so is the insurance for them.
The cost of buying and owning a vehicle makes up a significant chunk (about 10 percent) of the entire Consumer Price Index used to track US inflation. From January 2020 to January 2024, the cost of a new vehicle increased more than 20 percent, and the cost of used cars increased even more, while vehicle repair increased a total of 32 percent. Shortages of computer chips and other supply chain issues had a brutal impact on car production and created bottlenecks that drove up purchase prices, which in many cases have not come down.
Against this backdrop, a roughly 40% increase in auto insurance premiums from December 2019 “seems reasonable,” said Mark Zandi, chief economist at Moody’s Analytics.
Insurers are for-profit companies in the business of covering the costs of a wide range of incidents. So when their potential liabilities increase, companies say that premiums must also increase so that expenses do not exceed their income.
In just the fourth quarter of 2022, heavy underwriting losses left Allstate with a net loss of $310 million, even though it had raised premiums.
“The classic example is, you know, a bumper used to be a cheap part, and it’s not like that anymore because you’ve got advanced sensors in there — that makes it a pretty expensive proposition,” said RJ Lehmann, senior partner. at the International Center for Law and Economics, a non-partisan think tank.
Companies have also reported more accidents and more serious ones, leading to greater bodily injury and property damage, as well as higher medical payments – all of which insurers can cover based on policy scope, hurting net income margins.
“Insurance companies are coming to terms with this,” said Sonu Varghese, the macro strategist at the Carson Group, a financial firm. “I’m sure there’s some good old fashioned margin protection too.”
Another force that pushed insurers to raise premiums was the Federal Reserve’s rapid interest rate hikes starting in 2022. To smooth out returns and cash flow, insurers often reinvest their earnings. In 2021, insurers held many assets that would lose value if short-term interest rates rose. When those rates more than quadrupled, many insurers’ balance sheets were bloodied. (Now, however, these insurers have the advantage of reinvesting the remaining cash at new, higher interest rates.)
In recent months, Wall Street trading and industry analysts’ estimates suggest that the big insurers have completely 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 the annual claims it expects to pay. Shares of Progressive, known for its commercials featuring fictional saleswoman Flo, have soared nearly 20% since early January on a similar expected improvement in margins.
Many economists are not concerned that auto insurance alone could play a leading role in any resurgence in headline inflation, but it was a major reason price increases slowed less than analysts expected last month. (Motor insurance most recently contributed more than half a percentage point to the inflation index. If excluded, headline inflation would be only half a percentage point away from the Federal Reserve’s desired 2 percent rate.)
Samuel Rines, a market economist and author who closely follows the balance sheets and pricing decisions of major companies, called the jump in premiums “legitimate cost recovery,” according to most analysts. However, he noted that it had come “lagging” behind most corporate price increases.
This lag has frustrated people who have already faced a series of price shocks. And it has attracted the attention of consumers who see the recent spikes as an opportunistic and particularly aggressive use of the “cost-plus” pricing models they’re running.
Critics like Hal Singer, an economist at the University of Utah, who calls the recent premium hike “ridiculous,” note that consumers are legally required to buy auto insurance and are limited in their ability to shop around for the best plan when All major providers are lifting premiums around the same time and telegraphing more in the future.
According to an estimate by Insurify, an insurance comparison shopping site, the cost of car insurance will rise by an additional 7 percent this year.
In a quarterly earnings call, Allstate executives said they weren’t done with premium hikes in many states, but that they were sensitive to pushing customers too far — and potentially losing them to competitors who might be the first to stop escalating rates. .
“As more states get into the right zone from a margin perspective, we would expect the amount of rates we have to get in those states to decrease,” Mario Rizzo, president of property and liability, said on the call. “But getting a lower rate is good from a conservation perspective and we will continue to focus on that.”
Several leading voices at major banks are telling clients that while future waves of inflation will be volatile, there is still an overall deflationary trend — with relief around the corner for consumers and those hoping the Fed will cut rates sometime this year.
“While we are likely to catch some further large insurance increases, a sharp decline in year-over-year growth appears inevitable,” David Kelly, chief global strategist at JP Morgan Asset Management, said in a recent note.
“Once it starts,” added Mr. Kelly, “it should be the gift that keeps on giving.”
