Economists see car insurance rates climbing in 2022

Masks are coming off, COVID restrictions are coming down and motorists are hitting the road — and running straight into higher car insurance rates that show no sign of declining this year, economists say.

Pent-up demand for new and used cars, coming after a year of pandemic-reduced driving, is boosting risks for auto insurers, who pass the cost of that risk to consumers regardless of their accident and claims records.

While automobile insurers normally increase their annual rates by 3% each year, recent studies from Insurify and S&P Global Market Intelligence show that they rose 12% in 2021. Insurify predicts they will rise another 5% this year.

“The U.S. auto insurance industry had an underwriting profit in 2020 for the first time in a decade, as drivers stayed off the roads due to the pandemic,” said Hans Dau, founder of Mitchell Madison Group, a business consulting firm. “Now, high general inflation and ever higher increases in used and new car prices clearly drive up claims costs for insurers, given that claims frequencies and severities are returning to normal.”

Mr. Dau added that an expected interest rate hike in March, which will cause losses in property and casualty insurers' $2 trillion bond portfolios, is also “an important contributing factor to higher premiums.“

“P&C insurers have three times more invested assets than premium revenue, as they typically break even on underwriting and make all their profit on invested premiums, “Mr. Dau said.

Brian Marks, who teaches economics at the University of New Haven, said supply chain factors in the rate hikes include the increased costs of computer chips, parts and labor which all remain in short supply. This pressures car dealers to sell new vehicles above their MSRP, he said.

“Delays in repairs also mean, if applicable, the need for rental cars, which has also experienced rising prices,” Mr. Marks said.

Scott Holeman, media relations director for the Insurance Information Institute, an industry group known as Triple-I, said what feels like steep increases means the rates are returning to normal.

“While some recent news reports might give the impression that auto insurance rates are soaring, they are actually returning to pre-pandemic levels in the first quarter of 2022,” Mr. Holeman said. “Auto insurers gave back approximately $14 billion to policyholders at the beginning of the pandemic, as they anticipated fewer accidents during the economic lockdown.”

But he also cited Triple-I reports that collision frequency rose 42%, collision severity rose 43%, the fatality rate rose 26% and replacement parts costs rose 13% during the third quarter of 2021.

“We're witnessing a rapid rise in accident frequency and severity,” Mr. Holeman said. “These factors, combined with supply-chain issues, have driven insurers' auto losses to above pre-pandemic levels.”

Other industry research confirms that fewer Americans drove in 2020, decreasing accidents and keeping rates the same or lower than previous years.

Rates rose again in 2021 as many drivers returned to the road from pandemic lockdowns. 

S&P Global Market Intelligence reported last month that car insurance rates increased in November from 3% to 12% across multiple companies.

In March, April, and May 2021, Insurify reported that Americans drove 32% more miles than during the same period in the previous spring, although mileage did not quite return to 2019 levels.

“While the fatality rate decreased by 3% between spring 2020 and 2021, it remained 26% higher in 2021 than it was during the same period in 2019, suggesting that reckless driving habits adopted during initial pandemic shelter-in-place orders have endured well beyond the onset of the pandemic,” Insurify said in the report.

Christine McDaniel, a senior fellow at George Mason University’s Mercatus Center free-market think tank, said the Insurify study confirms that premiums for private passenger car insurance have been rising since last spring, after briefly declining for some drivers in December 2020.

“More people are driving under the influence, and road rage incidents are also increasing,” Ms. McDaniel said. “Road rage deaths and injuries doubled in 2021 compared to 2019. That means that insurance companies are shelling out more and more for each claim.”

A former U.S. Treasury assistant deputy secretary, she added that the ongoing supply chain issues and inflated prices show no signs of letting up.

“Auto parts are more expensive, and they take longer to get,” Ms. McDaniel said. “So instead of an insurance company paying for your rental car for one to three days, now it can take weeks for that bumper, windshield, or new camera or electronic part to come in.”