By on November 11, 2016

car insurance (State Farm/Flickr)

To quote Nobel Prize winner Bob Dylan, “You don’t need a weatherman to know which way the wind blows.”

You certainly don’t need TTAC to tell you auto insurance premiums are on the rise. You already know rates are trending up, well in excess of inflation. Nonetheless, let’s unpack some of the factors that have the average American now spending more than $100 per month on auto insurance.

First, let’s verify our experience with some facts. According to the Bureau of Labor Statistics, the average auto insurance premium per passenger vehicle in the United States increased 16.8 percent between 2009 and 2013, against consumer inflation of 8.6 percent over the same period. Based on data from AAA, the average American spent $1,222 in auto insurance premiums last year, which is consistent with research findings from Consumer Reports and the National Association of Insurance Commissioners.

The five largest auto insurers, State Farm, Geico, Allstate, Progressive, and Farmers, control 53 percent of the market. These five companies collected a combined $96 billion in auto insurance premiums in 2013. I am a capitalist, so I have no problem with companies seeking and earning a profit. However, their close cooperation through a labyrinth of industry non-profits as well as their extensive state and federal lobbying apparatus are cause for caution when dogging into the numbers.

What factors — other than the profit motive — impact auto insurance premiums and can they be quantified through reputable sources?

Americans drive almost twice as many miles as we did in 1980 and the number of Americans with driver’s licenses increased from 145 million in 1980 to more than 210 million today. One oft-cited stat, that the total of American roadways is up only six percent over the same period, is misleading. The total number of paved road-miles is up almost 11 percent and the total of freeway road-miles is up 23 percent, mitigating to some extent our increase in road usage.

What’s not controversial is that over the same period our average time spent in traffic congestion has more than doubled to 42 hours per year. In 2015, we racked up a total of 3.15 trillion miles. And as more miles are driven and on-road hours logged, more collisions occur. The volume of auto insurance collision claims reflect this, increasing in 14 of 16 quarters between 2011 and 2014. Almost seven out of every 100 insured vehicles had a collision claim in 2015.

Claims are now more frequent, and, to make matters worse, they are getting more expensive. The cost per claim was up 4.7 percent in 2015 to an average of $3,350, for a total of $21.4 billion. Nonetheless, the increasing frequency, severity, and cost of auto collisions does not account for the majority of the increase in insurance premiums.

Two other major expense categories for insurers are bodily injury and personal injury. Thankfully, cars are safer today. Vastly safer. Between 2005 and 2013 bodily injury claims tumbled 14.5 percent to 0.8 claims per 100 insured vehicles. Likewise, personal injury claims declined 15.6 percent to 1.25 per 100 vehicles. However, according to the Insurance Research Council (an insurance industry funded entity), the cost for these claims have skyrocketed. The cost per bodily injury claim increased 32 percent between 2005 and 2013, to $15,500 per occurrence. And personal injury claims are up over 38 percent to more than $8,000 each. The combined cost to insurers was nearly $31 billion in 2013.

When the decline in claims volumes and the increase in their average cost are baked together, the total increase in the cost of bodily injury claims to insurers was 14 percent between 2005 and 2013. The cost of personal injury claims increased 16 percent. Motorists and their passengers are substantially less likely to be injured in a collision, but the rising cost of treating those injuries has far outstripped the decline in their frequency.

What about insurance industry profitability? If insurance companies are raising premiums in lock step with increases in their cost of claims, then their profitability should be steady. Fortunately, most large insurers are publicly traded, meaning profitability information is easy to come by. The insurance industry uses underwriting profit, the difference between premiums earned and losses incurred, as its primary profitability metric. For example, a underwriting profit of 96 would generally be considered healthy by industry insiders, and indicates that out of every $100 an insurer collects in premiums it keeps $4.00 as profit. This represents a thin margin compared to many industries. For example, the auto industry operated at an average eight percent profit margin in 2015. Using underwriting profit as a proxy for profitability may be a shortcut, but is nonetheless a reasonable yardstick.

The Insurance Journal recently found that across the top 11 publicly traded auto insurers, their underwriting profit on personal auto insurance policies fell from 95.9 in 2014 to 97.3 in 2015. In other words, after paying out insured losses, these 11 companies kept $2.70 out of every $100 in premiums they collected in 2015. Allstate, the second largest insurer in the data set, reported an underwriting profit of 99.9 in 2015, down 5.1 percent from the previous year.

Now, before we discount the data by pointing to its source or the prevalence of financial engineering in the generation of financial statements, consider that most executives of publicly traded companies are highly incentivized to deliver higher stock values. Allstate’s executives are so incentivized. However, Allstate’s stock price fell 13 percent between the end of 2014 and the end of 2015. And so did Allstate CEO Thomas J. Wilson’s compensation, dropping 15 percent, or a material $2.3 million. Measured broadly, industry profitability was down almost six percent last year and eight out of the 11 companies analyzed were less profitable in 2015 than they were in 2014. Three reported losses.

Industry watchers are bearish on the auto insurance sector. According to Jim Auden, Managing Director at Fitch, one of the three major credit ratings agencies, “Stronger underwriters like Progressive consistently hit their 96 combined ratio target [underwriting profit], but the industry as a whole is not making money in Auto. While insurers are getting rate, that increase ends up offset by rising claims.”

In short, insurance companies got hit with unexpectedly sharp increases in bodily and personal injury claims expenses, which were compounded by modest gains in collision claims losses. They have collectively responded with rate increases, however the cost of their losses have risen faster than their rate increases. One additional factor to consider when comparing the information presented here with your personal experience, is that auto insurance is largely regulated at the state level, which results in significant regional disparities. For example, a motorist in expensive Michigan could move south across the border to inexpensive Ohio and reduce their auto insurance bill without reducing their overage by a whopping 67 percent.

Extortionate healthcare costs strike again. Each year we spend twice as much per capita on healthcare as the developed world average. And as large as the auto insurance industry is, it is dwarfed by the $3 trillion juggernaut of healthcare. Unless you believe the trend in healthcare costs is going to change, you should expect it to exert an ever-increasing influence over your auto insurance premium.

[Image: State Farm/Flickr (CC BY 2.0)]

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60 Comments on “With Premiums on the Rise, What’s the Truth about Auto Insurance?...”

  • avatar

    “Extortionate healthcare costs strike again. Each year we spend twice as much per capita on healthcare as the developed world average. And as large as the auto insurance industry is, it is dwarfed by the $3 trillion juggernaut of healthcare. Unless you believe the trend in healthcare costs is going to change, you should expect it to exert an ever-increasing influence over your auto insurance premium.”


    • 0 avatar

      No biggie, it’ll all be fixed in 2017.

      • 0 avatar

        2017? ObamaCare was supposed to bring costs down now. So much for Hope and Change.

        • 0 avatar

          Well, if you ask any healthcare provider, they’ll tell you that they’re not making much money at the prices they charge.

          So, if nobody is making any money yet the product is unaffordable, what do you do? Healthcare is a service industry, it’s made up of American people drawing salaries. I guess if you want a cut in healthcare costs then people lose jobs or take pay cuts. Not clear to me how this is better. I guess we’re all SOL.

          • 0 avatar

            There are two things driving up American healthcare costs:

            1) American education costs. Doctors here pay several times what doctors in other countries do for their medical educations. And they mostly do it with loans. So doctors make much higher salaries here than they do elsewhere, but they don’t actually see any of the extra money in their pockets until late in their careers. (Unless, like a distant and very lucky relative of mine, rich-a$$ parents paid for medical school. Did you say something about social mobility in America?)

            2) Competing insurance bureaucracies. Other countries either have a single government insurance bureaucracy or use private companies exclusively (on a heavily regulated basis). Here, we have the full government bureaucracy — and we have it both at the federal level, to operate Medicare, and at the state level in many states, to operate Medicaid and other state health programs. And we also have a private insurance bureaucracy, which happens to be far less efficient than those in other countries because it has to make more decisions. Our system is neither fish nor fowl and we would save a ton of money by either going all-federal-government (Canada) or all-private but heavily regulated (Germany). I favor the latter because I think it would do a better job of preserving our history of medical innovation.

          • 0 avatar

            Nice post.

        • 0 avatar

          Obamacare actually did dramatically slow the rate of health care inflation for three years. But that ride ended for this coming coverage year: we’re back to double digit premium rises.

          Ultimately, Obama’s try at a kinder, somewhat more efficient system is just a tweak of the same old non-universal, privatized health insurance system, and that system has never been efficient or fair. The rest of the civilized world figured out a long time ago that single-payer makes more sense.

    • 0 avatar
      Old Man Pants (nee Kenmore)

      “the trend in healthcare costs”

      Younger people are doing an admirable job of bloating themselves into competition with crumbling Boomers for metabolic complications of any procedure.

    • 0 avatar

      To add to dal’s post: A friend of mine who is a surgeon told me that he pays a large amount for his malpractice insurance – this without any suits being brought against him. I do not remember the exact figure but it was astounding as I remember. While this may not be a big factor in the cost of healthcare, it certainly contributes to some extent. Capping malpractice awards would contribute in bringing down healthcare costs by helping to lower the cost of that particular insurance. It may not be much, but every reasonable cut would be beneficial.

      Side note: My cost for subsidized coverage is going up over 100% for the exact same coverage next year thanks to the (Un)Affordable Care Act. (Yeah, I know that is a broad and irresponsible statement, but I don’t like the fact that the over 100% increase is a real deal.)

  • avatar

    That’s my Lexus in the pic! Same two tone beige paint and gold badges and everything :) I do have a bit more hair than the guy in the photo, and I’d like to think that I’m just a bit of a sharper dresser :p

    Just look at those beautifully crafted door cards and frameless windows boys.

  • avatar

    In Massachusetts, our state-regulated insurance rates has always been on the higher side, but premiums did not take gigantic leaps on a regular basis. I’m actually paying less ($79/month vs. $94/month) for my insurance on a midsize hatchback now than I was five years ago because I moved to a different town outside route 128. It doesn’t help that our state is full of crazy drivers (and wacky road routes that date back centuries) but my insurance for someone who doesn’t get into accidents with a reasonable car is pretty low.

    • 0 avatar

      Move a bit north and you will pay a lot less. I pay $600/yr for an M235i here in Maine. Full coverage, high limits, low deductibles.

      Mass does suck. Every time I drive one of my nice cars there I feel like I have a bullseye painted on my car.

  • avatar

    The fact that they are more willing to total a car than fix it anymore isn’t helping either. Of course part of that is the cost of parts and labor these days. It’s a dog chasing its tail, round and round she goes…

  • avatar

    Those people have had a VERY ’90s accident.

  • avatar

    “For example, a motorist in expensive Michigan could move south across the border to inexpensive Ohio and reduce their auto insurance bill”

    We don’t need you awful Detroit people down here. You stay up there with Tim Allen.

  • avatar

    If medical payments are such a huge portion of my premium ; why can’t I get a discount if I agree to no claims if not belted in ?

  • avatar

    Well ins in Nj is alive and well eating up about $350 a month for my family, no accidents that are my fault, but have had 2 uninsured motorist hit me that my ins covered., no tickets but a young driver who made my rates shot up 50% for the “right ” to drive to HS 4 miles round trip, but we have excellent coverage so I guess I could save some money if I drop down to my coverage.

    • 0 avatar

      why you would pay for a high schooler like that, I have no idea.

      I pay $1320/year for 3 cars, 2 of which have collision/comprehensive. We added an 18 year old new driver, still in high school, and that added only $270/year to that $1320.

  • avatar

    Location plays a big part in it as well.

    When we moved to Vegas last year, they jumped way up, even though we lived on the edge of Vegas (on the border of Summerlin, but still in Vegas). Then when we moved to Portland, it tumbled by over 50%.

    Now that we’re in University Park (Dallas), it’s back up again…but not nearly as high as I expected it to be.

  • avatar
    punkybrewstershubby aka Troy D.

    I pay $110 a month for 2 newer 4 door sedans and a motor scooter, full coverage $100 deductible. One decent collision would be triple that or even more at the yearly rate. No complaints here, yet.

  • avatar
    Old Man Pants (nee Kenmore)

    Child-free Boomer with spotless record gives phlegmy scoffs at this topic.

  • avatar

    Do any insurance companies offer discounts for cars that have the newer/latest electronic safety gadgets (like the collision avoidance system and auto-braking similar to the lane keep assist, blind spot monitoring, active headlights, and/or city safety smart braking)?

    As far as I have found, it looks like companies like State Farm, Nationwide, and Allstate, do not offer discounts for these technologies. Has anybody found anything different?

  • avatar

    Let’s see – Progressive, GEICO, Liberty Mutual (and maybe another) all promise to “Save you 15%, or 500 dollars, or whatever” over each other.

    With all of that, you’d think that insurance rates must be cheaper than ever!

    Oh, I forgot the millions that they spend on commercials.

    No mention of comprehensive losses (wildfires, floods, tornadoes) possible being on the rise.

    • 0 avatar

      They use different way to bin their insurers. Geico for example would count no point tickets just as bad and raise your rate, so for a lot of people they are actually more expensive than AAA. Some insurance co would forgive a couple accidents so that is to some people’s favor too.

      The same goes for combining insurance to get a discount: I actually found it cheaper to split my home and auto insurance because I can’t find a company that’s cheap in both. My home insurance is with a work from home agent somewhere in the middle of the wood, but she can’t do that with the auto insurance.

  • avatar

    Auto Adjuster here, can only speak for the repair side. Cheaper fuel prices means more people on the road, more collisions. Vehicles are more complex to repair (aluminum, specific guidelines from manufacturers, non-repairable parts), and labor rates continually rise. Bodily injury is chump change, most of the money gets spent in property damage. Also, different companies have different philosophies on profitability. Some are aggressive on underwriting, some are agressive on claim severity (tight,accurate repair estimates), and some that focus on keeping overall costs to see the claim (outsourcing local auto adjusters to photo estimating from vehicle owner’s smartphone).

  • avatar

    A good driver incentive through insurance premium reductions would be the best way to both change driver behavior and also reduce overall insurance claims…the problem is that the cost bar is way too high…the incentives are way too mediocre…and the system isn’t fair. And companies don’t really want to reduce claims overall…they just want to maximize market share in this perpetual burden on car owners…

    My buddy at work pays $1500 every six months for a devalued 2013 x5m…I couldnt sleep at night with that in my budget…I know many people could but the pendulum must swing back in favor of consumers…..unfettered capitalism can be held in check by competition…but not in this case…..

    There are whole industries built around mildly salvaged vehicle waste….and insurance companies quickly short sells to the LKQ and makes sure that ultimately the customer pays for every step of a cars life cycle….

  • avatar
    SCE to AUX

    “Extortionate healthcare costs strike again.”

    They’re not ‘extortionate’, because in the US, health care prices are inelastic.

    Just as Americans will pay any price for a gallon of gasoline, Americans will pay *anything* to live a minute longer. It’s particularly helpful if someone else (health insurer) is footing the bill while you provide a measly $20 copay.

    I had a 30-minute dermatology procedure this week. Despite my doctor knowing there is no problem, he’s sending out for biopsy (as he does every time) – presumably because he fears a lawsuit. So this simple outpatient procedure just became more expensive by a few hundred dollars.

    They ought to have a limited tort document that people can sign to reduce their health care premiums, just as with car insurance.

    • 0 avatar

      Tort reform hasn’t saved any costs to patients it just made DR’s and Hospitals wealthier (see Texas Tort reform enacted over a decade ago)

      Another big issue besides paying more to live longer is that most health care costs are hidden. When I call my insurance company for an estimate they always give me “well it depends we will not guarantee actual costs” until that’s fixed were screwed.

  • avatar
    DC Bruce

    It always puzzled me that, when I moved across the District Line from either the Virginia or Maryland suburbs, my insurance premiums (for all coverages) went up substantially.

    Not mentioned in the article is something that has affected all insurance companies who insure anything, provide annuities, and pension funds: extremely low interest rates for a sustained period. Insurance premiums are invested in relatively low-risk assets, like bonds. Thanks to the Federal Reserve’s “we’re going to save the world with cheap money” attitude, the returns from these investments has been pathetic. I’m surprised that not one of the sources discussed in this article mentioned that, because the idea is certainly not original to me.

    As a leading-edge Boomer, I’m waiting for my rates to go up when I hit 70, even though I have a decades-long record of no tickets and no accidents . . . and I sold my sports car a year ago.

  • avatar

    Correct me if I’m wrong (and I very well could be) but I believe that the continuing zero interest rate environment plays a much larger part in this than we likely think.

    It is my understanding that insurers setup a structure based on expected payouts and buy bonds and other investments to help meet their costs.

    If in the past they could get say a solid 5% each year in a safe investment, and now anything they buy pays say 1%… If costs stay the same, they need to make up that shortfall, and the only way to do so is to charge more money from their customers.

    • 0 avatar

      What they invest on depends on the company. Some go pretty risky. Allstate is willing to run up to less the 1% profit on premiums do to the investments. Back in the crash this caused headaches for some companies as their investments were pretty risky. Some have made alot of money with the markets over the past 7 years.

  • avatar

    “For example, a underwriting profit of 96 would generally be considered healthy by industry insiders, and indicates that out of every $100 an insurer collects in premiums it keeps $4.00 as profit.”

    I hate insurance companies as much as the next guy, but it is funny how Apple supposedly makes something like 69% profit margin on their iPhones, yet they don’t get near the hate.

    Our local health care provider Blue Cross and Blue Shield is actually run as a non-profit, yet people constantly scream that if we could just take the profits out of health insurance, it would be vastly cheaper for everyone.

    • 0 avatar

      “Our local health care provider Blue Cross and Blue Shield is actually run as a non-profit”

      That doesn’t mean they don’t still make a ton of money. ;)

      • 0 avatar

        I got my professional career start at BCBS in Maine – also a non-profit. What I saw there in my two years was eye-opening as to just how completely F’d this industry is. All non-profit really means is they get out of paying any taxes.

  • avatar

    Just like healthcare, there is no incentive on the part of the end user to be cost conscious. When I had my car accident back in June, my insurance company recommended a body shop, so I went there. They gave me an estimate and I said yes. Why bother shopping around when my deductible is the same either way? Who knows whether I could gotten the repairs cheaper. The insurance company didn’t ask me to try. They just paid whatever the bill was, no questions asked.

  • avatar

    I’ve gotta chime in on this one.Up here in the great white north-Quebec we ran the greedy insurance industry “òut of town” about 25 yrs ago.Our government seized control of the business of protecting drivers from the liability aspect of auto insurance.We have a No-fault insurance system wherin “individuals or companies cannot initiate legal proceedings against the person responsible for a traffic accident.Therin lie the keys to the safe.The majority of costs in auto insurance business are directed to the legal aspect of auto accidents.The enormous costs to our court system – born by us the taxpayers.It’s huge.Drag that out of the equation and things get reasonable again.Example:
    I insure my 2014 Audi Q5 with a commercial policy, I use my car for business and accumulate a lot of miles and it costs me $ 600 bucks (Canuck) a year.
    Proof that the government can actually run things – sometimes
    Last year the Quebec automobile insurance bureau declared a sufficient profit such that they lowered the rates.In my case about $50 bucks/yr.C
    If you are at all interested in the details:
    All this to say capitalism is the best system but sometimes it’s necessary to pull the reigns on certain industries when they get real smart and outmanouver the client/government.Go Bernie go.Sorry

    • 0 avatar

      There’s pretty good evidence all around that social insurance (which I think of as health insurance, but maybe it extends to car insurance), stable utilities (e.g. electicity), and possibly even retail credit unions can work better and cheaper when they’re publicly owned nonprofits.

      Funny story: some years ago, not a single broadband provider would agree to sell service to residents of a small rural city near me. So the city government established its own broadband provider, with super cheap citywide wi-fi for all. Suddenly the private sector rushed in to offer service, and at decent prices to boot, because they were terrified other cities might follow this town’s example and undercut them. The joke was on them, of course, because at that point it didn’t matter if the city kept operating its own system or not…they’d succeeded in getting the providers to offer service in their town.

  • avatar

    I really don’t wanna hear their sniveling. Auto insurance has to be among the most overpaid and profitable industries.

    • 0 avatar

      The auto side isn’t that profitable as noted you can look up the reports online. But it does provide a huge amount of cash flow for investing. Other types of insurance tend to be much more profitable. Combined ratio I forget what its called in the article but the percentage of cost vs profit, is often over 95 on the auto side I know some commercial and inland marine that have done closer to 70.

  • avatar

    Greetings from Phoenix, with the highest auto insurance in the nation.

    A toxic brew of many, many miles driven (five mile round trip to my nearest grocery), high speed travel (main city streets cruise at 45-50), oblivious drivers (streets are long, straight and not very crowded – boring, and too easy) and the fact everyone must drive for practically everything, and rates go through the roof.

    Only saving grace: no snow days.

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