In recent times, car buyers have enjoyed a reprieve as new, used, and rental car prices have declined. Yet, a curious anomaly persists: car insurance premiums continue to soar, defying the intuitive expectation that lower vehicle prices should translate into reduced insurance costs. This disparity raises a complex question: why are insurance rates still climbing when the cost of cars is dropping?
The answer lies in a confluence of factors affecting the insurance industry. Scott Shapiro, leading KPMG’s US insurance division, underscores that while vehicle prices do impact insurance premiums, they are not the sole determinant. A crucial element driving up insurance rates is the rise in severe accidents. The National Highway Traffic Safety Administration reports a grim increase in road fatalities, with nearly 41,000 deaths last year, an 8,000-person increase compared to 2013. Such a rise in fatalities translates into higher claim payouts and, consequently, elevated insurance premiums.
For the past year, car insurance rates have surged by 18.6%, marking the third-largest annual increase in recent history. This surge, reported by the Consumer Price Index, reflects a significant rise in insurance costs. However, this rate of increase represents an improvement compared to earlier in the year, when premiums had jumped by 22.2%, a rate not seen since 1976.
The broader economic context provides further insight. While general inflation has moderated, with the CPI slowing below 3% for the first time since March 2021, vehicle prices have decreased. Used car prices have fallen by 10.9%, while rental and new car prices have dropped by 6.2% and 4.4%, respectively. This decline is attributed to increased inventory and extended sales cycles for new vehicles, resulting in greater discounts and incentives.
Ivan Drury of Edmunds explains that the drop in used car prices is directly linked to the glut of new cars on the market, leading to discounts on older inventory. As new car sales slow, dealerships offer more substantial discounts to move stock, which, in turn, influences used car prices.
Despite these reductions in vehicle prices, insurance premiums remain stubbornly high. Josh Damico, Vice President of Insurance Operations at Jerry, a car insurance savings app, notes that insurance premiums often lag behind changes in vehicle and repair costs. Insurers are adjusting to past conditions and have been slow to reflect the current drop in vehicle and repair costs in their pricing. However, with auto repair costs rising at a more modest rate of 3.4% compared to the previous year's 12.7%, insurers are beginning to reassess and potentially lower their rates.
As the insurance industry adapts to these changing conditions, the high premiums are expected to eventually align more closely with the current market realities. While immediate relief may not be apparent, the stabilization of repair costs and vehicle prices could lead to more favorable insurance rates in the near future.
