Car prices may fall soon, but auto insurance will cost more. Here's why.
Updated: May 1
People are spending more of their money on auto insurance, and that cost is likely to continue growing.
Drivers nationally are spending an average of 2.93% of their income on car insurance this year, based on an average annual premium of $2,014 for full coverage insurance and the national average annual income is $68,852, Bankrate said. That amount rose from 2.57% in 2022 when the average premium was $1,771. And the difference means car insurance rates increased by nearly 14% between 2022 and 2023, compared with an overall rise in yearly inflation of 6.5% in December.
What's worse, rates will keep rising this year as auto insurers continue to catch up with exploding costs of repair parts, labor, and claims, experts say.
Basically, that means most insurers are losing money on auto policies, said Martin Ellingsworth, P&C Insurance executive managing director at analytics company JD Power.
What states are spending the largest portion of their incomes on auto insurance?
New Yorkers spend the highest percentage of their income on car insurance (5.05%, up 1.18 percentage points from a year ago). The state’s average annual premium of $3,139 is well above the national average of $2,014 and $143 higher than last year.
The high premium is "likely due in part to the crowded roads in the state," Bankrate insurance editor Cate Deventer wrote in a report. “More vehicles on the road increases the risk of accidents, and thus the risk to insurers, which charge a higher rate to compensate. “
Florida was a close second, rising 0.48 percentage points to 4.9%, with an average annual premium of $3,183, up $421 from 2022.
What states are spending the smallest portion of their incomes on auto insurance?
Mainers pay 1.03% of their income on car insurance, the smallest amount, likely because Maine’s far less densely populated than New York or Florida, which results in fewer car accidents. That percentage fell 0.41 percentage points from last year. Maine’s average full coverage premium is $941, 53% lower than the national average even though it’s up $65 from last year.
Vermont at 1.16% was next, with an average annual premium of $1,061, up $61 from 2022. Last year, Vermonters paid 1.48% of their income to car insurance.
Why are Americans spending more on auto insurance?
Rising costs of repair parts, labor, and medical care; increases in frequency and severity of crashes; record levels of personal injury judgments and vehicle thefts are boosting insurers’ costs, Deventer said.
Some of those costs have been passed on to consumers, but there’s more coming. Car insurance prices lag since an insurer must submit new rates to the Department of Insurance in each state where it operates and wait for approval before increasing prices.
How much more can Americans expect to pay for car insurance?
Car insurance rates are expected to increase by 8.4% across the U.S. in 2023, the largest rate increase in six years, according to a report from research firm ValuePenguin.
The average cost of full coverage car insurance is expected to be $1,780 per year, but rates will vary dramatically between states, ValuePenguin said.
In California, for example, Progressive recently received approval for a 19% rate increase for those renewing their policies or buying new ones.
“That’s a watershed event,” Ellingsworth said, noting Progressive is one of the most accurate forecasters. “It’s a bellwether event for what the rest of the industry might need.”
What else determines your auto insurance rate?
Factors that determine your car insurance rate include:
Location: State and city and, in most places. Even your location within your city affects your premium. Different areas mean different risks. For example, theft rates and population density can affect crash rates.
Driving record: Lapses in coverage, speeding tickets or other moving violation convictions, at-fault accidents, or drunk driving may flag you as a high-risk driver. For example, a drunk driving conviction in Michigan can increase an average premium by 173%, the highest in the nation, with full coverage rates jumping to $7,337 from $2,691 per year.
Credit score: Drivers with lower credit scores statistically file more claims, which leads to higher rates, Bankrate says. Nationally, drivers with excellent credit pay about 49% less than drivers with poor credit. However, California, Hawaii, Massachusetts, and Michigan prohibit using credit scores as a factor.
Teen driver: Adding a teen driver with little driving experience can more than double your rate. A married couple plus a teen driver can result in an average increase of $2,378 over the national average of $2,014, Bankrate says. Hawaii and Massachusetts prohibit age as a rating factor, but Massachusetts allows using years of driving experience.
Type of vehicle: Typically, vehicles that cost more to repair or replace will cost more to insure. Some technology like automatic braking could make crashes less likely but would cost more to repair, which could shift costs in your policy breakdown. Electric vehicles require specialized parts and highly skilled labor to repair, which is likely to increase insurance costs as that market grows.
What does this mean for me?
Plan to pay more for auto insurance and check your coverage to make sure you’re not underinsured.
Let's say you have a policy with a $25,000 bodily injury liability limit per person, often the minimum requirement in many states, and cause a crash that results in serious injuries to another party. Because medical care costs have risen sharply with inflation, $25,000 may not cover as much anymore.
New Jersey and Tennessee each increased their minimum coverage requirements on Jan. 1 for this reason, and it has yet to be seen if other states will follow, Deventer said.
“The increase in the cost of living could make minimum limits no longer sufficient, and more states may increase their requirements,” she said.
Source: Medora Lee is a money, markets, and personal finance reporter at USA TODAY.
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