A different kind of sticker shock has struck American car buyers like Darin Davis.
When the 56-year-old Dallas real estate agent renewed the insurance on his pearly-white 2024 Cadillac XT4, the rate almost doubled in January, just a few months after his purchase.
“It’s disheartening to own a new car when you’re paying so much money,” said Davis, mentioning that he might have chosen a less expensive model if he had known about the significant increase beforehand. Unfortunately, it was too late by then.
In a unexpected turn of events in an inflation-burdened U.S. economy, car prices are decreasing after a surge during the COVID-19 pandemic. However, rising auto insurance rates are consuming a portion of those savings for consumers, with some models now costing more than a quarter of the total ownership expenses.
Vehicle prices have started to ease as the supply chain disruptions of the pandemic, especially the shortage of crucial computer chips, have been resolved and car manufacturers are replenishing their inventories. Nevertheless, factors such as higher costs associated with repairing advanced vehicles and increased damage from severe weather due to climate change are driving insurance rates up.
Car buyers are not the only ones affected by insurance inflation. Federal Reserve policymakers aiming to reduce overall inflation are facing unforeseen challenges, including the sharp increase in insurance costs.
Affordability Concerns
The Consumer Price Index increased by 3.5% last month compared to a year earlier, according to the Labor Department. However, auto insurance expenses soared by 22.2% during the same period, marking the largest increase since the 1970s.
On the other hand, new vehicle prices declined by 0.1% and used car prices dropped by 2.2% compared to a year ago. Car dealers are offering more incentives to buyers, which helps lower initial costs. While it’s uncertain to what extent insurance rates are influencing purchasing decisions, there are indications that it’s becoming a more significant factor, especially for budget-conscious consumers.
“Many shoppers are indicating that they are refraining from purchasing or returning a car because they can afford the vehicle itself, but not the insurance,” said Sean Tucker, a senior editor at Kelley Blue Book.
Kelley Blue Book has recently included insurance advice in its list of buying tips, recommending that shoppers obtain an insurance quote before committing to a purchase.
Car insurance rates vary widely across the country and are influenced by various factors, including local repair shop costs and the risk of damage from natural disasters. According to Insurify, the average cost of full auto coverage in the U.S. increased by 24% last year, reaching just over $182 per month. The company reported that 63% of drivers surveyed experienced rate hikes in 2023 and projects an additional 7% increase in 2024, with the potential for further escalation.
“We’ve observed significant activity in the first quarter that suggests there may be further increases,” said Jessica Edmondson, a data specialist at Insurify.
Overall Cost
Insurance costs are expected to continue growing as a percentage of the total ownership expenses of a vehicle, encompassing factors such as regular maintenance, taxes, depreciation, fuel, and insurance. According to Kelley Blue Book, insurance represented an average of 16% of these costs for a compact car in 2019 and is projected to increase to 26% in 2024. For a compact SUV, the percentage was 13% in 2019 and is expected to rise to 20% this year.
A combination of factors has contributed to the current surge in insurance rates. A higher number of vehicles are being declared total losses, quality issues arose during the production disruptions of the pandemic, leading to increased insurance claims. A shortage of mechanics has lengthened repair times, driving up costs for insurance companies providing rental cars to policyholders awaiting repairs. Modern cars are equipped with more electronics, making them more expensive and complex to repair.
“A bumper isn’t just a bumper anymore – a sensor-laden bumper costs more to repair,” explained Kristin Dziczek, a policy advisor at the Federal Reserve Bank of Chicago with expertise in automotive trends. Electric cars, in particular, are around 30% pricier on average and may require longer repair times.
Changes in car manufacturing processes are also impacting insurance costs. For example, Tesla introduced gigacasting, a method that involves casting a single part to replace multiple metal pieces in traditional vehicles. While this reduces production costs, it can elevate repair expenses for vehicles involved in accidents.
Other automakers are adopting similar techniques, such as Cadillac producing a model using 16 gigacastings.
Meanwhile, Davis, the Dallas real estate agent with the Cadillac, eventually found a more affordable option by bundling his car and homeowners insurance and raising the deductible.
FAQ
Q: What is causing the surge in auto insurance rates?
A: Factors such as increased repair costs, higher vehicle totals, and the complexity of modern cars are contributing to rising insurance rates.
Q: How can consumers mitigate the impact of insurance inflation?
A: One strategy is to bundle different insurance policies to potentially lower overall costs.
Conclusion
As auto insurance rates continue to rise, consumers are facing new challenges in the affordability of vehicle ownership. Understanding the factors driving these increases and exploring ways to mitigate the impact can help consumers make informed decisions when purchasing and insuring their vehicles.
