Our nation’s fleet of hyper-safe vehicles is expensive to insure
By Jim Lynch
Inflation moderated in the United States last year, but the price of auto insurance did not help matters.
The Consumer Price Index for motor vehicle inflation finished the year 20.3% higher than year-end 2022, according to the Bureau of Labor Statistics, the biggest increase since 1976.
There are many causes, but as big and as vexing as any: the cost of fixing a wrecked car. The problems behind the spike in overall inflation—supply chain issues, worker shortages, rising prices for new or used cars (or for renting one)—all drove up repair prices, too.
Cars themselves have changed. Electronics accounted for 40% of a new car’s cost, according to a Deloitte study, up from 27% a decade earlier. Cars contain more sophisticated parts, chock-full of semiconductors and high-tech driving aids. Their replacement parts cost more, the technicians that repair them get paid more, and the time to repair them has increased.
Insurers have responded in obvious ways (raising rates) and subtler ones—like discouraging new business.
The spike in repair prices has faded, and insurers have started to catch up. Results are improving, but it may be years before underwriting profits return industrywide.
As of January 2024, the Insurance Information Institute (Triple-I) estimated a 108.8 combined ratio for U.S. personal auto insurers in 2023, so for every dollar of premium, the industry paid almost $1.09 for losses and expenses.That’s measurably better than a year earlier (112.2), but not sustainable for an industry that was writing to 98 and 99 combined ratios in 2018 and 2019, respectively. (See Chart 1.)
The deterioration is surprising, given a long-term decline in claim frequency. An Insurance Research Council study showed claim frequency fell 2% a year on average across 20 years, from 2002 to 2022. Fewer accidents equals fewer cars to repair. Absent anything else, that means lower rates.
But while the accident rate has fallen, the cost of repairs has gone up far, far faster. Claim severity rose on average 4.5% annually.
The basic relationship—the size of a claim rises faster than the accident rate falls—is almost a truism in insurance. It extends back to the early 1960s, at least.
Within that long trend, frequency and severity take twists and turns.
The pandemic introduced convulsions.
You remember it, even if you’d rather not—lockdowns, empty schools, working from home. They took drivers off the roads. Americans drove 167 billion miles in April 2020 (seasonally adjusted)—nearly 60% less than just three months earlier and the lowest monthly total in nearly 20 years, according to Federal Highway Administration data.
Cars that aren’t on the road aren’t in accidents. Claim frequency plummeted. The pandemic had handed insurers a windfall.
They gave a lot of it back—$14 billion, according to Triple-I. (Full disclosure: I led the team that made this estimate.) Some Some was returned via rebate, but some of the largest insurers lowered rates by more than 10%. Even so, the combined ratio fell below 93.
Slowly, drivers returned, though Americans still drive less than before the pandemic. When the drivers returned, the accident rate rose. Those permanently lower rates were too low.
The pandemic had other inflationary effects, as you might recall.
- Supply chains: Lockdowns shuttered factories, including ones that manufactured automobiles and auto parts. Many of the autos and the parts arrive from overseas; their freighters got stuck in a line of freighters waiting to reach port for unloading—the supply chain crisis. The price of autos and auto parts soared.
- Rental cars: During the pandemic, travel—whether for business or pleasure—ceased. Rental car companies hunkered down. To raise cash and survive, they sold off much of their inventory—hundreds of thousands of vehicles. The result: a shortage of rental vehicles, so dire that when tourism did recover, for example, Hawaii vacationers rented U-Hauls. They were all there was to be had. The shortage drove the cost of car rentals up.
- Used cars: Businesses locked down and laid off workers. Unemployment hit 14.8%. To support workers and businesses, the federal government provided $3.3 trillion via five relief bills passed in 2020, plus another $1.8 trillion in 2021, including cash payments to tens of millions of Americans. That extra cash, plus the changed spending patterns engendered by the pandemic (remember Peloton?) drove general inflation into the double-digits. One of the biggest risers? Used cars.
- Worker shortages: The pandemic drove up unemployment. Then, the stimulus created a worker shortage. Instead of returning to their old jobs, workers sought new careers. The displacement started an inter-industry bidding war for talent. Wages rose.
To see how this affected insurers, consider the humble auto claim. The damaged car enters the shop. The parts to repair it are jammed up by problems in the supply chain. The time to repair vehicles drags on because of the worker shortage. While the car is in theshop, insurance pays for a temporary rental car.
When each of those costs rose, the cost of repairs rose.
For used cars, the impact is more subtle. Damaged cars are sometimes repaired and sometimes declared a total loss. That decision is a function of used car prices. If the cost of repairs exceeds a certain percentage of the value as a used car in good condition, the car is declared a total loss. Less than that, the car gets fixed.
Used car prices act like a policy limit for damage claims. When used car prices shot up—10.3% in 2020, 37.7% in 2021—the effect was the same as raising the limits of a liability policy. The top payout for a damaged car rose, and with it the average cost of repair.
The pandemic created its own problems, but it also exacerbated an issue that had been emerging for several years.
The IRC data show that the size of damage claims had begun to accelerate in the mid-2010s. (See Chart 2.)
Cars were becoming significantly more complex. During that time, the car became “basically a computer on wheels,” said Brian Sullivan, editor of the Auto Insurance Report.
A typical car has somewhere between 1,000 and 3,000 semiconductor chips in it, according to Polar Semiconductor, a chip manufacturer.
The chips do all sorts of things. They determine how much gasoline to shoot into the engine. They tell the sparkplugs when to fire. They check the air in the tires. They manage the infotainment system. Some chips monitor the others, looking for breakdowns.
And they prevent accidents.
These last constitute the Advanced Driver Assistance System, which is invariably discussed using its acronym, ADAS—an important component in lowering accident rates.
ADAS works with the driver to get the car safely down the road. Automatic emergency brakes slow the car down if it gets too close to the car ahead. Other systems monitor whether the car is drifting into another lane. Others check the blind spot or operate backup cameras.
These chips operate in a delicate system. They are expensive to make and expensive to install.
CCC Intelligent Solutions is a Chicago company that studies every moment and every expense in the process of repairing a vehicle: the time spent fixing it, which parts are used, how much technicians make. It is all collected into CCC’s databases, which it analyzes for industry players: automakers, parts makers, repair shops, insurers.
Writ large, the story follows the general story of price and wage inflation brought on by the pandemic, said Kyle Krumlauf, CCC’s director of industry analytics. Shortages drove up the price of parts. When that began to tail off, wages rose.
In 2021, the total cost of repairs rose 10%. In 2022, it rose 12%. Last year was better, Krumlauf said—about 5% higher. (See Chart 3.)
CCC’s data detail precisely what is driving up the cost of repairs. Each crept inexorably higher, then accelerated with the pandemic. Behind each nugget of information, Krumlauf had a story:
- Technicians are paid more—The average weekly wage of a technician rose 9.1% from Q2 2020 to Q2 2021, according to the Bureau of Labor Statistics. In 2022, CCC attributed the increase to the wave of retirements similar to what many industries saw, compounded by a long-term struggle to recruit new talent. Wages rose another 9.6% the next year but the trend seems to be tailing off, Krumlauf said.
- More parts are needed per repair—13.5 through Q3 2023. That’s 21% more than in 2020 and 50% more than a decade earlier. As parts become more complex, they become harder to repair. They get replaced instead.
- Parts cost more—The average part cost about $140 last year, not much more than the past two years, but more than 10% higher than in 2020. The pandemic interrupted supply chains. More replacements were made using parts designed and made by the original manufacturer of the car. Those generally cost more than when another manufacturer makes the same part.
- Repairs are taking longer—27.3 hours through Q3 2023, 11% more than three years earlier. A big part of this is spent on scanning and calibration.
- Scanning—The microchips that monitor the car’s performance can make a report on what ails the vehicle. Technicians scan vehicles when they enter repair (to pinpoint what must be done) and when they leave (to ensure everything is good). They sometimes scan periodically throughout the repair, to make sure that fixing one thing didn’t knock something else out of whack.
- Calibration—ADAS components need to be accurate and precise. “You want the system telling the car the right information,” Krumlauf said. No one wants a sensor saying a car is 20 yards ahead of you when it’s actually only 15 yards ahead. After repairs, the ADAS system needs to be recalibrated.
Calibration is a high skill. Its technicians are specialists. The car has to be just so. The tire pressure has to be at a specific level. The amount of gas in the tank matters.
Usually the repair shop outsources the work. Often, the vehicle gets towed to the calibration outfit. All that takes time (and adds two towing charges to the bill).
There’s an irony here. Cars are safer than ever. A new car is a hot nest of cameras and sensors, scanning the roads the way spotlights scrutinize a prison yard. They inform drivers what lurks. They also relay the information to a network of microprocessors that honeycomb the vehicle.
They undoubtedly prevent accidents. Ironically, they make insurance more expensive.
The cost of replacing them and the rest of the vehicle costs more than is saved by avoiding accidents. So the loss cost—what insurers pay to fulfill their obligations—rises. If that goes up, rates will, too.
And they have.
Among major insurers, rates rose 11.4% in 2022 and another 14% in 2023, according to RateWatch, a product of S&P Global Market Intelligence that monitors data for the largest companies in 49 states (not Wyoming).
Physical damage rates rose 16.2% That was faster than liability rates, which went up 12.9%.
Allstate increased rates 26% on its cornerstone brand over the seven quarters ending last September, President and CEO Tom Wilson told investors. Michael F. Klein, Travelers Insurance’s executive vice president and president of personal insurance, told investors the company had realized a 16.7% increase in premium through the third quarter. Progressive raised rates 13% in 2022 and another 4% in the first quarter of 2023, The Wall Street Journal reported.
Not surprisingly, the increases have stirred consumers. Insurance shopping increased in the second half of 2022, according to LexisNexis Risk Solutions. But customers largely stuck by their carriers, said Sullivan, the Auto Insurance Report editor.
“Shopping has been high, but switching has been low,” he said. You go out and shop and find that everybody’s rate has been going up.”
Insurers have tightened their portfolios in other ways.
They pursued new business less rigorously, something that shows up in lower advertising spending. Standard personal auto advertising expenditures industrywide peaked in 2020 at $3.8 billion, according to AM Best data. They fell 5% in 2021 and another 18% in 2022. (See Chart 4.)
For Allstate, this meant new issued applications declined 19.5% year-on-year at the third quarter—mainly in unprofitable states. Progressive reported a 20% decline over the same period due to its “self-imposed pullback in media spend.”
Across the industry, companies have been restricting writings in subtle ways as well, Sullivan said. He has heard reports of carriers cutting back on monthly payment plans and slowing down underwriting approvals, where such steps are allowed.
All told, the actions seem to be working. Most prognosticators project auto insurers’ results to keep improving in 2024.
Swiss Re projects underwriting results across the industry to improve, “led by personal auto.” Rates are rising, they note, and they expect “disinflation” in physical damage costs “to improve personal auto margins.” At year-end, used car prices were 1.3% lower than a year earlier, according to Bureau of Labor Statistics data. Inflation in motor vehicle parts and equipment was negative 1.2% over the same period.
Triple-I projects physical damage costs to abate, but not decline. The other trends that CCC described—longer repair times, higher labor costs, more parts per repair, scanning, calibration—aren’t going away.
It projects a 104.8 combined ratio this year, a four-point improvement from 2023. It projects 101.9 for 2025.
“We all have to acknowledge this appears to be permanent,” said Dale Porfilio of the Triple-I. “So we have to get [the increased cost] into prices.”
The optimal solution: a world in which the falling accident rate perfectly offsets the rise in repair costs. Until the current environment yields, that day is a long way off.
JIM LYNCH, MAAA, FCAS, is a freelance writer.
Dealing With Auto Theft
Auto theft was a problem that seemed to be going away. The pandemic brought it back, and with it a new reason insurance rates needed to climb.
Motor vehicle theft peaked in 1991, according to data collected by the Council on Criminal Justice. It fell by two-thirds, bottoming out in the 2010s with around 220 thefts per 100,000 people, thanks to better entry technology (sophisticated keys and fobs), better training for police, and ubiquitous surveillance cameras.
But from 2019 to 2022, auto theft rose 29%. As so often is the case, you can blame the pandemic.
The convoluted world of lockdowns drove up the price of several precious metals contained in a catalytic converter. For example, rhodium went from $6,125 per troy ounce at the end of 2019 to $29,500 per troy ounce four months later. (By January 2024 it had fallen to $4,250.)
In a strict economic sense, metals like rhodium were worth more outside the catalytic converter than inside it. Thieves would steal the car to get the converter. Or they would just get under a parked car and slice it out.
Either way, it was one more contributor to rising auto insurance premiums. Car theft is covered by the comprehensive portion of a personal auto policy.
Adding to the theft totals: Certain Kias and Hyundais became easy to steal. You could use a flathead screwdriver to pop out the ignition cylinder and wire the car up using a USB-A cable. The how-to videos were on TikTok. State Farm stopped writing certain makes and models in certain states.
About 1 million vehicles were stolen in 2022, according to the National Insurance Crime Bureau. NICB reported the pace continued in 2023, with 500,000 cars stolen through June.
But there is good news: The rate of thefts is still less than half what it was in the 1990s.
The Regulatory Angle
Regulatory drag—the time between recognizing that rates need to rise and actually charging more—is a common issue for personal auto insurers.
The length of the lag depends on the state for which the
increase is sought. Some states have more permissive laws, simply requiring
insurers to notify them an increase will occur. Other states require approval
in advance. Some approvals can be more
difficult than others.
This last go-round has been less difficult than many. Results were so bad. The combined ratio in 2022 was the worst in the history of auto insurance, said Brian Sullivan, editor of Auto Insurance Report.
The fact that the price of parts was so involved also made a difference.
“When markets go south, it’s almost always liability that drags them there,” Sullivan said.
Liability increases get more scrutiny, Sullivan said, because they are more politically sensitive.
Most states—“even where the regulators resist” (in Sullivan’s words)—have responded promptly.
California was an exception. It has what many actuaries consider a grueling prior-approval process to changing rates.
That process halted in 2020. State Insurance Commissioner Ricardo Lara put a moratorium on increases, arguing that insurers had earned excessive profits during the pandemic.
He could point to a sharp dip in loss ratios—from just under 64% in 2018 and 2019, for insurers writing California physical damage—to a 52% in 2020,† according to RateWatch, part of S&P Global Market Intelligence.
The moratorium remained as repair costs accelerated. Loss ratios rose to 71% in 2021 and 84% in 2022.
The moratorium was lifted in October 2022. Now insurers are playing catch-up in the largest state. Thirteen percent of all auto physical damage premiums were written there in 2022.
*Here loss ratio is calendar year direct incurred loss and direct cost containment expenses divided by direct earned premiums.
How the Actuary Fits In
For actuaries, when prices are rising, the obvious role is to determine how much to raise rates overall, then break that increase down based on variables like driving record and territory.
When the costs arise from advanced driver assistance systems (ADAS), the challenge has a twist.
Allstate actuary Maggie Kong gave me a high-level overview.
Kong is a pricing director at Allstate overseeing a team developing pricing models. Her team focuses on segmentation: determining, for example, which model of a car is cheaper to insure based on its likelihood of being in an accident and how much repairs will cost.
There are challenges: Manufacturers all develop their own systems. Some work better than others. Some cost less to fix than others.
And manufacturers are constantly redesigning parts and ADAS elements. They often do so to reduce the cost of repair, Kong said.
A few years ago, she said, sensors were placed in windshields. That proved expensive to repair, so many of those sensors were moved into the black box that the rearview mirror attaches to.
Bumpers used to have a lot of sensors, but they’ve been moved in a lot of cases—again to keep the repair cost down.
With so many makes and models, and with models moving their sensors around from year to year, and with the point of many changes to keep the car from being in an accident, mathematical credibility becomes a problem, even for a large insurer like Allstate.
“It can be hard to establish how much of severity change is driven by the way it is manufactured,” she said.
Allstate augments its data with information from analytics organizations like the Highway Loss Data Institute. HLDI collects accident data from many insurers.
Its sister organization, the Insurance Institute for Highway Safety, conducts crash tests that show, clinically, how effective a safety device is. It compares the efficacy of the same feature across many models.
An added wrinkle: Some safety features are often included in an option package. That means two cars of the same make, model, and year could have different sets of ADAS.
In the past, actuaries pulled information from the vehicle identification number (VIN). The VIN’s first digit, for example, tells what country the vehicle was manufactured in. The next two letters identify the manufacturer.
The VIN tells a lot, but it’s impossible to divine which vehicles have which safety features by decoding the string. Actuaries turn to aggregators, which have created databases that show the specific set of features that each car has.
“A lot of these features are not on a good portion of these cars,” she said.
