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What’s Driving Auto Insurance Rates?

Jan 6, 2022

Like consumer prices across many parts of the economy, auto insurance rates are rising, too. Rate increases can be difficult for consumers, but as their trusted, expert adviser you can help your clients understand what’s driving the changes as you work with them to navigate the road ahead.

Returning to “normal” (frequency)

Driving behavior changed dramatically due to COVID-19, especially at the onset of the pandemic. Fewer miles driven meant fewer accidents and, therefore, lower overall costs for auto insurers. The industry responded quickly by issuing refunds/credits to customers, lowering rates, or both.

In recent months, driving behavior has nearly returned to pre-pandemic levels—and so has the frequency of accidents. As the number of claims returns to (and then surpasses) pre- pandemic expectations, insurers’ costs follow. To pay the increasing claims, auto insurance rates must then also return to (and then surpass) where they were before the pandemic.

Vehicle miles travelled (VMT) dropped nearly 14% in June 2020 vs. June 2019. In June 2021, VMT returned to within one percent of the June 2019 level, and within two percent of where they are estimated to have been had the pandemic not affected driving behavior.

Rising repair and replacement costs (severity)

When accidents occur, auto insurers pay for the parts, labor, and other costs associated with repairing or replacing the damaged vehicles. Since the start of the pandemic, supply chain disruptions and labor shortages have driven these costs up substantially.2

The Bureau of Labor Statistics reports that average expenditures for vehicle repairs have risen more than 4% over the last year, while used car and truck prices have skyrocketed by more than 40% over the same period.3

Initially, the reduction in accidents offset the rising vehicle repair and replacement costs. That is no longer the case. Driving behavior has returned while these costs continue to escalate.

The Manheim Used Vehicle Value Index measures used vehicle prices while controlling for any shifts in underlying vehicle characteristics. The index shows a relatively steady, modest trend in prices in the years leading up to the pandemic, followed by a much steeper trend in the post-pandemic time period.4

 

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