Why is car insurance so expensive?

Car insurance prices have skyrocketed. According to the Bureau of Labor Statistics, average policies have gone up 55% in the last three years.

Mark Fitzpatrick, a licensed property and casualty insurance producer and a personal finance expert at MoneyGeek, explains why prices are rising and what drivers can do to save.

6 questions with Mark Fitzpatrick

The cost of a new car in America, on average, is now about $50,000. Is that part of why insurance is going up?

"Absolutely. So when you think about what an insurer is doing when you have an accident, especially a property damage accident, insurance is for injuries and property damage. Those car prices you're talking about are part of the property damage. What we saw after COVID, especially with supply chain dysfunction as such, is that car repair costs went up and they didn't go down like a lot of things after COVID, like a lot of inflated prices. So there's that.

"And also the fact that cars are more expensive than ever. They have more technology than ever. It's going to cost more to repair your car. When someone makes a claim, it's more costly to insure, and they'll raise rates over time."

Health care is more expensive. Is that part of this, too?

"Absolutely. So you think about just health care costs in general, going up, that's the other side of insurance, the liability side for bodily injury. So if you're at fault for an accident and you injure someone else and you are found liable, you're on the hook for, or your insurer is on the hook if you're insured, for those bodily injury costs.

"So basically, if health care costs are going up, your insurer's on the hook for that in terms of bodily injury. That's going to hurt the insurer's bottom line. These aren't like super high-margin businesses. So to balance their books, if health insurance or health costs are getting more over time, their costs are going up and, of course, everyone's costs will go up because they have to balance their books somehow."

What other factors are at play?

"I break it into kind of the personal and then the institutional regulatory. On personal, insurers are measuring your risk. So if you're a 16-year-old driver, it's kind of like pre-crime and 'Minority Report.' They're predicting you're going to crash your car if you're 16 years old, so they're going to charge you higher rates or charge your family higher rates if you're a young driver, if you have a history of claims.

"There are even some very controversial ways of measuring risk. They use what's called a credit-based insurance score, which is kind of like a credit score, but not quite. If these insurers think that you have a higher chance of making a claim, because of a poor credit history, for example, they might charge you double what they might charge someone with a good credit-based insurance score.

" Then there's the institutional. These states have different kinds of legal regulatory structures for how to handle car insurance. So, a state like Massachusetts, not super expensive, and it's a no-fault insurance state. So for bodily injury, no matter who's at fault, you're gonna get covered for some of your health care costs, no matter who's at fault. Whereas other states or tort or at-fault states, they have to go into the legal system to figure out whose fault it is, decide litigation, all that. So there are these philosophical differences, and no-fault states tend to be more expensive than fault states. But the original intention behind no-fault was they had good intentions. They wanted to cut out all this civil litigation, right? But what you found is in some states, like Florida, for example, has resulted in a lot of fraud and abuse of the system, and that can actually raise rates for everyone."

What does an average insurance policy tend to cost right now?

"For MoneyGeek, we have the average cost of a full coverage car insurance policy at about $2,500 annually. I'm just taking a sample driver, like a 40-year-old driver with a clean record. But for that same driver, you might go from a full coverage policy costing over $3,000 in Florida. Or just $900 in Vermont, for example. Same person, same car, same record.

"And then even within states, you might see huge variations. Someone within Florida who lives in a more rural area with less dense traffic and not very many car thefts might have a much lower rate than someone living in downtown Miami, where your risk of getting into an accident is much higher."

 Can insurance companies charge what they want? Are there regulations that apply to the premium hikes they can put in place? Are there regulations to prevent price gouging?

"It depends on the state. Many states are file-and-use, where an insurer will make public their filings about how they're going to raise rates. They have to be based on reasonable cost calculations, but the state regulation office only has to approve them afterwards, or reject them afterwards. But they can put these rates into effect.

"There are other states that are much stricter, which are called prior approval. The insurers have to get approved before they actually enact the rate increases. But of course, it has an unintended consequence, right? If an insurer can't raise its rates to cover costs, it might just leave the state, and then you have less coverage, less insurers, more expensive insurers, and you're at risk of a little bit of a vicious cycle there."

Do you have any suggestions for a good way to shop around?

"Check out some rate pages and put in your information to see, 'Hey, what might be my estimated rate?' Make sure you apply for all the discounts. Use an insurance broker if you need one. They can look into data and find you multiple rate options and see what's best for you.

"And it takes a little time. I know no one wants to do that, add that to their busy lives, but you're potentially talking hundreds of dollars over six months, and it can be done fairly quickly, all things considered."

This interview was edited for clarity.

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Julia Corcoran produced and edited this interview for broadcast with Micaela Rodriguez. Allison Hagan adapted it for the web.

This article was originally published on WBUR.org.

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