Friday, May 24

Spike in auto insurance hampers fight against inflation

Jobs, wages and business growth are all buoyant and inflation has fallen sharply from 2022 highs. But consumer sentiment, while improving, is still sour.

One reason could be sticker shock from some very visible prices, even as overall inflation has calmed. The cost of car insurance is a key example.

In January alone, auto insurance grew 1.4% month-on-month and over the past year it has grown 20.6%. the biggest leap 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 helped dampen the “mission accomplished” sentiment about inflation that was simmering in markets earlier in the year.

According to a recent private sector estimate, the average annual premium for full coverage auto insurance in 2024 is $2,543, compared to $2,014 in 2023 and $1,771 in 2022.

This spike has a number of causes, but the central one is simple: Cars and trucks are now more expensive, so is the insurance for them.

The cost of purchasing and owning a vehicle makes up a substantial portion (about 10%) of the entire 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%, that of used cars increased even more, while overall vehicle repairs increased by 32%. Shortages of computer chips and other supply chain problems have brutally impacted auto production and created bottlenecks that have pushed up purchase prices, which in many cases have not come down.

Against this backdrop, the increase in auto insurance premiums of about 40% since December 2019 “appears reasonable,” said Mark Zandi, chief economist at Moody’s Analytics.

Insurers are for-profit companies whose job it is to cover the costs of a wide range of accidents. So as their potential liabilities increase, companies say premiums must also increase so that expenses don’t exceed revenue.

As recently as the fourth quarter of 2022, large underwriting losses led Allstate to a net loss of $310 million, even as it had increased premiums.

“The classic example is that, you know, a bumper used to be a cheap replacement part, and that’s no longer the case because there are advanced sensors in it — which makes it a pretty expensive proposition,” said RJ Lehmann, a member senior at the International Center for Law and Economics, a nonpartisan research center.

Companies have also reported more, even more serious accidents, leading to greater personal injury and property damage, as well as higher medical payments – all cases that insurers may be required to cover based on the breadth of the policy, harming net income margins.

“Insurers are dealing with this,” said Sonu Varghese, macroeconomic strategist at Carson Group, a financial firm. “I’m sure there’s some good old-fashioned margin protection in place, too.”

Another force pushing insurers to raise premiums was the rapid interest rate hike initiated by the Federal Reserve in 2022. To smooth out returns and cash flows, insurers often reinvest their proceeds. In 2021, insurers held a lot of assets that would lose value if short-term interest rates rose. When these interest rates more than quadrupled, many insurers’ balance sheets were bloodied. (Now, however, these insurers have the advantage of reinvesting their remaining cash at new, higher rates.)

In recent months, trading movements on Wall Street and industry analysts’ estimates indicate that the large insurers have completely turned the tables.

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 risen nearly 20% since the start of January, boosted by a similar expected improvement in profit margins.

Many economists are not concerned that auto insurance alone could play a major role in an eventual recovery in overall inflation, but it was a major reason why price increases slowed less than analysts expected on Thursday. last month. (Auto insurance recently contributed more than half a percentage point to the inflation index. Excluding it, overall inflation would have moved only half a percentage point away from the 2% pace desired by the Federal Reserve.)

Samuel Rines, a market economist and author who closely follows the balance sheets and pricing decisions of large companies, called the jump in premiums “legitimate cost-covering,” in line with most analysts. Yet he noted that it came “with a delay” compared to most corporate price increases.

This delay has frustrated people who have already been through a series of price shocks. And it has drawn the attention of consumer watchdogs who see the recent spikes as an opportunistic and particularly aggressive use of common “cost-plus” pricing models.

Critics like University of Utah economist Hal Singer, who calls the recent increase in premiums “ridiculous,” point out that consumers are required by law to purchase auto insurance and are limited in their ability to shop around for the best plan when everyone major providers are raising premiums around the same time and reporting more on the way.

According to an estimate from Insurify, an insurance comparison site, the cost of car insurance will increase by an additional 7% this year.

In a quarterly earnings call, Allstate executives said they weren’t done with premium increases in several states, but that they were sensitive about pushing customers too far — and potentially losing them to competitors who might stop first on rate escalation.

“As more and more states get into the right zone from a margin perspective, we would expect the amount of rate that we have to charge in those states to decrease,” Mario Rizzo, president of property and liability, said on the call. “But having to accept lower rates is good from a loyalty perspective and we will continue to focus on that.”

Several leading voices at major banks are telling clients that while the future wave of inflation will be unstable, an overall disinflationary trend is still underway – with relief around the corner for consumers and those hoping the Fed will lower rates this year.

“While some further outsized increases in the insurance sector are likely ahead, a sharp decline in year-over-year increases would appear to be inevitable,” David Kelly, chief global strategist at JP Morgan Asset Management, said in a recent note.

“Once it starts,” Kelly added, “it should turn into a gift that keeps on giving.”