The High Cost of Car Insurance for Both Drivers and Insurers

You may have noticed that insuring your car has gotten insanely expensive. It isn’t just happening in the U.S., and it isn’t all about used-car prices either.

Source: WSJ | Published on February 23, 2024

the cost of auto insurance

You may have noticed that insuring your car has gotten insanely expensive. It isn’t just happening in the U.S., and it isn’t all about used-car prices either. Several large insurers in Europe have pointed to a surge in motor insurance premiums in their 2023 full-year results.

On Friday, Allianz said the segment was a big driver of property and casualty revenue growth in its German home market. The day before, Paris-headquartered AXA reported that motor premiums rose 7% and 12% last year in its commercial and personal lines, respectively. In emerging regions that include Asia, Africa and Latin America, the former increased a whopping 33%.

Zurich Insurance, which owns Farmers Insurance as well as MetLife’s former auto business in the U.S., announced similar numbers Thursday. Earlier this month,

Allstate said it increased premiums on its branded auto insurance by 16.4% last year. Travelers raised them 16.7% in the fourth quarter.

The impact on consumers’ wallets is so large that the macro economy is affected too. In the U.S., auto insurance costs are up an eye-watering 39% relative to December 2019, and contributed more than 0.5 percentage points to the increase in the consumer-price index in January, which came in higher than anticipated. In the U.K., the cost of these premiums jumped by an even larger 64% over the same period.

In the eurozone, the rise in the cost of motor insurance isn’t as stark, but it was enough to push the January CPI up by an additional 0.1 percentage point. Previously, it had no influence on broader inflation at all.

What is behind this? For one, the skyrocketing cost of secondhand cars and parts in recent years, not to mention repair services, has made it much more expensive to fix or replace damaged vehicles. Allstate, Travelers and Spain’s Mapfre have all reported combined ratios in the vehicle business above 100% at several points in 2023. This means that the premiums earned, as lofty as they were, were less than the sum of claims and operating expenses. Allianz said Friday that its number for the full year was 97.9%—barely profitable.

Cars were a boon for many insurers early in the pandemic, when people weren’t driving anywhere. But they have since joined natural catastrophes in being a big headwind for their stock prices.

Used-vehicle prices are now falling back or at least stabilizing, helping to plug the gap for insurers. This trend might continue, as the car industry gets back to normal after the production constraints and stimulus checks that fueled inflation in the Covid era. Allstate and Travelers both reported an improvement in combined ratios in the second half of 2023.

But the recovery in profitability seems to be happening very slowly, and will likely require further increases in premiums. The repair bill may rise for reasons unconnected to used-vehicle pricing. AXA’s report pointed to an increase in claims because of “changing postpandemic driving habits.” Similarly, U.S. insurers said last year that accidents are now more severe. The evidence points to drivers getting more reckless.

It may be that many people got used to emptier roads during the pandemic, and just need time to adapt. But there is also a chance that younger drivers are less safety conscious, or that remote work has instilled a dangerous habit of responding to professional obligations while driving.

For insurers and drivers alike, cars may remain an expensive proposition.