According to the recent Consumer Price Index data released in March, auto insurance rates rose an eye-popping 21 percent year-over-year. We asked Bryant University Mathematics Professor Rick Gorvett, a Fellow of the Casualty Actuarial Society, about the steep increase and whether he sees any relief in the coming months.

What’s caused the recent spike in auto insurance rates?

The recent spike in personal auto insurance rates – by some measures, as much as 20% or more in some recent months, indicated by current versus costs 12 months prior – is a confluence of several factors.  Almost a perfect storm, one might say.

• The cyclical nature of the insurance business. During 2022 and into 2023, insurers had large underwriting losses.  Over the last year, they have been trying to increase rates and rate adequacy to sustainable levels.  This is a very common phenomenon in property-casualty insurance – a multi-year cycle from high rates accompanied by insurer profitability to lower rates and insurer losses, and back-and-forth again and again – and has existed as a industry reality for many decades. This cycle is partially driven by competition and the coming and going of alternative risk management mechanisms which compete with traditional insurance.
• Supply chain issues. During and immediately after the pandemic, computer chips and other necessities for the manufacture and availability of modern automobiles saw supply shortages, leading in turn to supply shortages of cars. This caused price increases with respect to both new and used vehicles, and vehicle cost or value influences insurance premiums.
• Increasing vehicle repair costs, due to more technically sophisticated electronic and computerized equipment in vehicle manufacturing, as well as certain modern manufacturing techniques that often require the replacement or repair of a large integrated part (as opposed to a smaller component in the past).
• Social inflation. This is the general tendency of insurance losses to inflate at a higher rate than overall consumer inflation and includes social forces involving things like increased litigiousness and larger tort awards.
• Driving behavior. Even before the pandemic, there was empirical evidence that overall driving behavior – perhaps most notably, distracted driving – was causing more frequent accidents and even fatalities.

Some folks are saying we have not seen a spike like this “since the 1970s.” Are there similarities/differences between now and then?

The mid-1970s is the last time we saw insurance prices take such a significant increase (in auto insurance, but also some other lines).  There are some general commonalities in context between now and then.  In both cases, we were coming off (and even somewhat in the middle of) some significant economic disruptions – oil shocks and historically high interest rates and inflation in the 1970s, and the pandemic-generated and exacerbated conditions more recently.  Another similarity involves the stage of the insurance underwriting cycle: large insurer losses and inadequate / unsustainably low insurance rates, which needed to increase for a healthy insurance industry to endure. 

Are we seeing an increase like this in other insurance policies or is it only being seen in auto?

Similar situations and effects are being seen in several lines of insurance other than personal auto, although perhaps not as extreme or widespread.  On the personal lines side, homeowners insurance is seeing some substantial increases, and in certain geographical areas homeowners rates have become enormously expense, or sometimes even unavailable. (Although much of this situation is a function of larger and more frequent losses from natural catastrophes, possibly induced by climate change.)

On the commercial lines side, some workers’ compensation insurance rates have recently had substantial increases. By its nature, workers compensation is heavily dependent upon, and influenced by, general economic conditions, and it is not surprising that some of the recent economic disruptions, and then economic recovery, has caused uncertainty and fluctuation in those prices.

What happens when auto insurance becomes unaffordable?

As personal auto insurance hypothetically becomes less affordable, there are a number of potential effects and responses.

• If rates are reasonably adequate with respect to the underlying loss costs, it is possible that additional suppliers will enter the insurance market, resulting in lower rates through enhanced competition.  This is a frequent effect of a “hard” market (one where rates are high and insurers are profitable). 
• Alternative risk mechanisms – either through voluntary organizations like insurers themselves, fin-techs, or insure-tech organizations – may be introduced. This has already been happening over the last decade, so this trend might accelerate.
• Government-mandated and/or supported markets. New or existing facilities – e.g., assigned risk planes, joint underwriting facilities, and other substandard risk mechanisms – might be introduced or expanded.
• A change in legal basis of loss. While this is probably unlikely in the extreme, there would certainly be calls for the negligence-based liability framework that exists now, to a limited liability, first-party, or even no-fault basis for insurance policies and losses.

As the cycle balances out, what can consumers do to make their policies more affordable?

Increasing deductibles, thereby retaining or self-insuring more of your own risk, can reduce premiums. You can also take advantage of safe driving or other types of discounts. Bundling of policies (e.g., auto and homeowner’s insurance with the same company) can often lead to premium savings. Finally, shop around for the best rate!

Realistically, do you think auto rates will go down, or are we stuck with skyrocketing rates?

I believe that auto insurance rates will shortly stabilize or perhaps even go down a bit. There is evidence that some companies now feel that rates are much more adequate now and are more sustainable, compared with a couple of years ago. This would all be consistent with the typical insurance underwriting cycle, which fluctuates on a multi-year basis between hard (high prices) and soft (low prices) markets.

I also think that the competitive framework of the insurance industry – with many companies, along with newer fintech and insure-tech organizations – is strong and can be a source for additional capital and potentially lower rates within the insurance industry.

One more interesting observation. If one looks at auto insurance inflation between 2014 and 2017, it was pretty constant, at about 7% per year. The next four years,(2018-2021), there was very little or no growth – overall, perhaps one percent per year. (While this coincides with COVID, when mileage driven and auto traffic was reduced resulting in many insurers voluntarily returning part of policy holders insurance premiums, the early part of that period, particularly 2018, makes it hard to empirically separate the underlying causes of inflation numbers.) Over the last two years, we have seen large increases in the mid-and-upper-teen percents per year. 

Where would we be now pricewise, if auto insurance prices had continued to grow at a regular 6% or 7% per year after 2017? Right about where we are now!