If your auto insurance premium has increased significantly since last year, you are not alone. The consumer price index for personal auto insurance has increased by 7.4% in the last 12 months, compared to a 1.5% decrease in 2021, according to the U.S. Bureau of Labor Statistics.1 In addition to rising inflation, auto insurance companies are also facing an increase in the number of accidents. How are insurance companies reacting to these pressures of increasing costs, and is there anything drivers can do to reduce their premiums?
How are auto insurance companies reacting?
In a countrywide analysis of over 2,000 approved personal auto rate filings effective in 2022, 93.5% of the filings were for a positive rate change. In addition, more than 62% of the filings were for a rate increase greater than +5.0%.2 This analysis includes five of the top personal auto writers in the country. Most notably, GEICO’s average rate change across all states is 12.0% and Allstate’s average rate change across all states is 7.7%.
Figure 1: Average rate change for large personal auto insurers – 2022
| Company | Average rate change |
|---|---|
| State Farm | 4.2% |
| GEICO | 12.0% |
| Allstate | 7.7% |
| USAA | 5.4% |
| Progressive | 6.1% |
The average rate increase taken by these companies during 2022 is higher than rate changes we have seen historically. The table in Figure 2 summarizes nearly 15,000 countrywide personal auto rate filings effective in 2016 through 2022. Prior to 2020, the average rate change was approximately +4.4%, as compared to the average rate change of approximately +7.0% in 2022.3
Figure 2: Average rate change
| Year effective | Average rate change |
|---|---|
| 2016 | 5.6% |
| 2017 | 5.6% |
| 2018 | 4.0% |
| 2019 | 2.3% |
| 2020 | 0.5% |
| 2021 | 1.8% |
| 2022 | 7.0% |
Breakdown of personal auto premium
To better understand why personal auto insurance rates are on the rise, it is helpful to have some background knowledge on the components that make up insurance premiums.
Premium is meant to cover the expected future claims (losses) and expenses of a policy plus a profit provision for the insurer.
Specifically, auto insurance premium covers losses involving a car and any corresponding injuries of the driver or passengers covered by the policy. Losses fall into different coverages based on who is at fault, what (or who) got damaged (or injured), and the policyholder’s state of residence. There are some coverages that are required and some that are optional, again varying by state.
There are several coverages that are required by most states:
- Property damage (PD): If the policyholder (insured) is at fault, insurance will pay to repair damage caused to another person’s vehicle or property.
- Bodily injury (BI): If the insured is at fault, insurance will pay for medical expenses incurred by a third party, lost income as a result of injuries, and it can also pay for legal fees if the insured is taken to court. This coverage provides compensation for the injuries of the driver or passengers in another car, pedestrians, or unrelated passengers in your car.
There are several coverages that are frequently required by most states:
- Uninsured motorists (UM) or underinsured motorists (UIM): Insurance pays for injuries or damages that you, family members, or passengers suffer after an accident with an at-fault driver who has no insurance or insufficient coverage.
- Personal injury protection (PIP): Insurance covers healthcare expenses associated with a car accident regardless of who is at fault. This coverage is required in 12 states and is optional in seven states.
There are several coverages that are optional in most states, but may be required if you have a loan on your car:
- Collision (COLL): Insurance will pay to repair or replace your car if damaged in an accident. This coverage is optional if you own your car.
- Comprehensive (COMP): Insurance covers damage to your car caused by things other than a car accident, such as a fire, hailstorm, theft, or falling objects.
- Medical payments (MED): Similar to PIP, insurance covers healthcare expenses for you or your passengers, regardless of who is at fault.
Insurance companies offer a variety of limits (the highest dollar amount the insurance company will pay) for the coverages listed above, including amounts per occurrence, per accident, or per person, depending on the coverage. However, COLL and COMP coverages are limited to the cash value of the car.
Calculating your auto insurance premium
If insurance premiums are meant to cover expected future losses and expenses, how does an insurance company estimate future losses?
Two measures that insurance companies look at are the frequency and severity of claims. Frequency is the number of claims per exposure (i.e., the number of earned car years). Severity is the amount of loss per claim, or the average cost per claim. Insurance companies respond to deviations in these diagnostics by implementing rate changes. If the frequency and/or severity trends (among other factors) indicate that future losses are expected to be higher than future premium, insurance companies will most likely file for rate increases. Conversely, if trends indicate that future losses are expected to be lower than future premium, insurance companies may consider filing for rate decreases.
The table in Figure 3 shows the average year-over-year change in frequency and severity for all personal auto coverages combined. The average change in frequency from year end 2020 to year-end 2021 was an increase of 0.6%, while the average change in severity was an increase of 11.3%.4
Figure 3: Average change in frequency and severity
| Year ending | Frequency | Severity |
|---|---|---|
| 2012 - Q4 | ||
| 2013 - Q4 | (2.1%) | (0.8%) |
| 2014 - Q4 | 1.2% | 3.5% |
| 2015 - Q4 | 2.9% | 3.7% |
| 2016 - Q4 | 0.9% | 8.0% |
| 2017 - Q4 | (1.8%) | 3.5% |
| 2018 - Q4 | (1.1%) | 0.4% |
| 2019 - Q4 | (1.2%) | 4.5% |
| 2020 - Q4 | (18.8%) | 8.1% |
| 2021 - Q4 | 0.6% | 11.3% |
Note: Frequency uses 100 earned car years as the exposure base.
While the increase in frequency in 2021 is small, it was negative for the four prior years. In addition, frequency was at a mostly steady state before the COVID 19 pandemic. During the height of the COVID 19 pandemic, frequency sharply decreased. This was a result of fewer cars on the road due to travel restrictions and work-from-home requirements. Since the first quarter of 2021, frequency has been increasing to pre-COVID-19 levels as a result of restrictions being lifted. Many companies are requiring some level of return to the office, and more people are driving on the road again.
Regardless of the pandemic, severity has been increasing each year since 2013. We would expect to see the cost of auto insurance claims generally increase over time due to inflation. However, for most coverages, severity has been increasing since early 2021 at a higher rate than historically seen.
Digging into the coverages
For PD, COLL, and COMP coverages, the graphs in Figure 4 show severity increasing steadily for all quarters since the beginning of 2017, with minor disruptions due to the pandemic. Since 2021, COLL severity has increased at a higher rate than PD or COMP. For these coverages, insurance payments are primarily based on the value of the car that was damaged. From July 2021 to July 2022, the consumer price index for used cars and trucks increased by 6.6% and the consumer price index for new vehicles rose by 10.4%. In the five years prior to COVID-19, the consumer price index for used cars decreased by -0.9% and increased by an average of 0.0% for new cars.5 The value of new and used vehicles is increasing due to supply chain issues, the semiconductor chip shortage, and inflation. In addition, cars are now outfitted with more technology such as cameras and sensors. What used to be a minor accident can now damage technology that is more expensive to repair.
On the frequency side, we see slight decreases for both PD and COLL through 2019, and then a big decrease throughout 2020. The frequency for COMP often corresponds to weather-related events. As a result, COMP frequency was more volatile than other coverages pre-pandemic and decreased more sharply in the first quarter of 2020. Frequency for all three coverages has been increasing back to pre-pandemic levels since the first quarter of 2021.
Figure 4: COLL, COMP, and PD frequency and severity
Source: ISS/ISO/NISS Private Passenger Fast Track Data Q1-2012 through Q1-2022 Multi-state. Retrieved August 4, 2022.
For BI, we see increasing severity for all quarters since the beginning of 2017, with larger increases in the more recent quarters. As BI covers medical expenses and lost wages, the high inflationary environment during the past year could be a cause of the recent increases. From July 2021 to July 2022, the consumer price index for medical care services increased by 5.1%, compared to the five years prior to COVID-19, when the consumer price index for medical care services increased by 3.2% annually.6 PIP severity has been slightly volatile over the past few years, decreasing through the first quarter of 2020, increasing through the first quarter of 2021, and decreasing for the past year. Given that BI and PIP cover medical expenses, as well as lost time if work is missed (in some cases), we would expect the severities to behave similarly. However, because a limited number of states have PIP coverage and the amount of PIP coverage differs by state, the overall severity could be influenced by a varying number of PIP claims among the states that offer the coverage.
For frequency, we see BI decreases for all quarters except a slight increase in the first quarter of 2022. For PIP, we see flat frequency through 2019 and a sharp decrease throughout 2020. Similar to BI, we see a slight increase in the frequency during the latest few quarters, rebounding to pre-pandemic levels.
Figure 5: BI and PIP frequency and severity
Source: ISS/ISO/NISS Private Passenger Fast Track Data Q1-2012 through Q1-2022 Multi-state. Retrieved August 4, 2022.
Tips for decreasing your auto insurance
So what steps can you take to make sure you are spending a reasonable amount on your auto insurance? A few things to consider when you next speak with your insurance agent:
- It is important to make sure that you have coverage that fits your level of risk. Do your research and talk to your insurance agent about appropriate coverages, deductibles, and limits.
- Make sure you’re getting the discounts you deserve. For example, if you are driving significantly less than before the pandemic, you could qualify for a discount based on fewer miles driven. Other discounts may include a credit for defensive driving courses, multivehicle, or bundling discounts. Your insurance may even give you a discount for donating to charity.
- Explore enrolling in a safe-driving smart app program that takes into account specific driving behavior such as speed, phone usage, and braking.
Conclusion
Except for PIP severity in the most recent quarters, both frequency and severity are increasing for all coverages. These increases are resulting in higher auto premiums. This trend is likely to continue in the future if inflation remains high and supply chain issues persist. However, there are actions you can take to make sure you’re getting the lowest possible premium.
1 U.S. Bureau of Labor Statistics. (August 10, 2022). Consumer Price Index News Release. Retrieved October 4, 2022, from https://www.bls.gov/news.release/archives/cpi_08102022.htm.
2 S&P Global Market Intelligence. Rate Watch Report. Report Date: August 30, 2022. Includes filings entered on www.ratefilings.com through: August 24, 2022.
3 S&P Global Market Intelligence. Rate Watch Report. Report Date: August 30, 2022. Includes filings entered on www.ratefilings.com through: August 24, 2022.
4 ISS/ISO/NISS Private Passenger Fast Track Data Q1-2012 through Q1-2022 Multi-state. Retrieved on August 4, 2022.
5 U.S. Bureau of Labor Statistics (August 10, 2022), op cit.