Amid sticky inflation and financial pressures, Americans are grappling with another rising cost—car insurance.
Austin Scarpelli, a 23-year-old student at the University of Illinois at Chicago, has felt the pinch firsthand. His monthly insurance premium with Progressive escalated from $144 at the end of his last six-month cycle to $186 for the upcoming period ending in March 2024.
The uptick in car insurance costs is part of a larger trend in the latest inflation data from the Consumer Price Index (CPI) report. The data shows motor vehicle insurance surging by 19.2 percent year-over-year as of November, straining household budgets that are preparing for the holiday season.
Tuesday's CPI print showed that while overall consumer inflation came in-line with economist predictions of a 3.1 percent annual rate, core inflation—which excludes volatile food and energy prices—showed an acceleration. There was persistent inflationary strength in sectors like rent, medical care and car insurance, which doesn't help the Federal Reserve in its effort to bring inflation to its 2 percent target rate.
For Scarpelli, the impact is tangible, as he is feeling a direct hit to his finances. He told Newsweek that even though he's never been in an accident, the increase in car insurance premiums is a "real-life burden" that adds to his existing financial pressures, affecting daily life and future planning.
"I've been super careful on the road, never had a scratch on my car, but here I am, forced to cut back on essentials just to keep my car insured," Scarpelli said. "It feels unfair, like I'm being punished for something out of my control."
Analysts and economists point to various factors driving up insurance costs. The combination of rising vehicle prices, increased claims and shifting driving patterns during the COVID-19 pandemic has created a perfect storm.
Environmental issues like Hurricane Ian in 2022 caused premiums to go up as well. A report from S&P Global Market Intelligence issued in May found that the hurricane—creating more than $112 billion in damages—caused auto insurers to lose an average of 12 cents on every dollar earned from premiums.
According to the Insurance Information Institute, Americans paid $2,008, or $167 per month, this year for full-coverage insurance, while minimum liability was much cheaper, averaging $627 per year, or $52 per month. On a state level with full coverage, Michigan has the highest annual insurance costs at $3,643, with Vermont having the cheapest at $1,199.
However, while insurance costs are climbing, companies aren't profiting from it, and increased costs may continue into 2024, according to S&P Global analyst Tim Zawacki. The industry's average combined ratio for auto insurance, which measures underwriting claims and expenses against earned premiums, hit 112.2 percent last year.
Exceeding 100 percent indicates that insurance companies are not making profits from their underwriting operations. Zawacki expects insurers' combined ratios to average about 101.2 percent next year.
The root of the problem lies in the rising severity of claims, Zawacki said, which has been outpacing premium increases. Despite multiple rounds of rate hikes, insurers are struggling to align their rates with the escalating loss costs. Zawacki said that the mismatch is partly due to a post-pandemic landscape where there's been an increase in severe car crashes, often occurring at higher speeds, leading to more litigated claims and consequently driving up costs.
Looking ahead, Zawacki expects the industry to brace for continued upward pressure on claim severity, which will likely keep premium rates on an upward trajectory.
Uncommon Knowledge
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
About the writer
Aj Fabino is a Newsweek reporter based in Chicago. His focus is reporting on Economy & Finance. Aj joined Newsweek ... Read more
