Why is car insurance still so expensive even though car prices are falling?
New, used, and even rental car prices continue to fall, while auto insurance premiums remain steeply elevated. This opposing trend seems intuitive: If the price tag on a car has dropped, the cost of insuring it should also drop, right?
If only it were that easy.
“It’s a mosaic of factors that affect the cost of auto insurance,” said Scott Shapiro, who heads KPMG’s U.S. insurance practice. “While there is a general correlation between the price of the vehicle and insurance as it relates to physical damage, there are other factors beyond the price of the car that affect the cost of premiums.”
For example, nearly 41,000 people died in traffic accidents last year — 8,000 more than in 2013, the National Highway Traffic Safety Administration estimated. That led to an increase in claims that are well above the average dollar amounts of the past, according to data from LexisNexis Risk Solutions.
Relief could be imminent
Auto insurance premiums rose 18.6% in July from a year earlier, according to Consumer Price Index data released Wednesday. That was the third-largest price increase among all other goods and categories the CPI tracks.
Still, that’s an improvement from March, when auto insurance premiums rose 22.2% year over year. The last time auto insurance premiums rose as much as they did in 1976 was in 1976.
But just like general inflation in the economy, where the pace of price increases has cooled, the actual dollar amount consumers are spending on goods and services is much higher than it has been in recent years. However, auto prices are falling. That means not only have price increases slowed, but auto prices have actually fallen.
Used car prices fell 10.9% from a year ago, the third-largest price drop among all goods and categories tracked by the CPI. Rental and new cars also became cheaper, with prices falling 6.2% and 4.4%, respectively.
The sharp decline in used car prices is a “direct reflection” of the new car sector, Ivan Drury, director of insights at Edmunds, noted in an analysis released Wednesday. Dealerships are taking longer to sell new cars, resulting in discounts of $1,000 on average. “A buildup of new cars on the lot last year was the catalyst for discounts and perks on aging inventory,” he added.
That could eventually translate into lower insurance premiums, said Josh Damico, vice president of insurance operations at Jerry, a car insurance savings app.
“Auto insurance premiums lag behind factors like prices of vehicles and repairs, so insurers have been playing catch-up over the past year or two,” Damico told CNN. Auto repair costs, which rose 3.4% from a year ago, have cooled significantly since last July, when they had been rising at an annual rate of 12.7%, CPI data show.
With both cost factors now leveling off, “many insurers are rethinking their prices and are already lowering them,” he said.
