Auto insurers are raising rates, even as car prices ease. ‘The pandemic has been really disruptive to the auto repair business,’ economist says

Auto insurance premiums have been among the fastest-rising prices for consumers over the past year, according to federal data — a dynamic that might seem at odds with car prices, which are broadly trending lower.

So, what’s going on?

In short: Auto insurance prices generally track those in the car market but do so with a lag, economists explain. Insurance costs have jumped following record-high car prices during the pandemic era, and are likewise expected to fall in coming months.

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“The pass-through takes a while,” Stephanie Roth, senior economist at J.P. Morgan Private Bank, said of pricing.

Average motor vehicle insurance prices rose by 17.1% in May versus a year ago, according to the consumer price index.

That’s among the largest annual increases of any consumer good or service, bested only by prices for margarine, frozen vegetables, motor vehicle repair and meals at schools and employee sites, according to CPI data.

Prices were up 2% alone between April and May.

About a third (31%) of U.S. auto insurance customers say they experienced a rate increase during the past year, according to a recent study by J.D. Power.

The average consumer pays $2,014 a year in premiums for “full coverage” auto insurance, or nearly 3% of their income, according to a 2023 Bankrate study. (These policies generally include liability and collision coverage.)

Many factors have conspired to push up the cost of car repairs, which ultimately feeds through to insurance prices, economists said.

For one, many auto body shops and auto maintenance companies went out of business during the pandemic, which has reduced their supply and driven up repair costs, said Mark Zandi, chief economist of Moody’s Analytics.

“The pandemic has been really disruptive to the auto repair business,” he said.

Car wrecks also surged in 2022.

Deaths from car crashes in the first quarter of 2022 were the highest in two decades, according to the U.S. Department of Transportation. That dynamic puts financial pressure on insurers that receive an influx of insurance claims for car damage.

Auto insurers lost 12 cents on each dollar of customer premiums paid in 2022, on average, according to J.D. Power — the worst showing in more than 20 years.

That left insurers few options but to raise premiums, J.D. Power said. Customer satisfaction then plummeted, falling at its most rapid pace in two decades, it added.

“They’ve really juiced up those premiums,” Zandi said. “At some point — and I think we’re getting there — people are going to balk.”

Further, vehicle prices began rising at a rapid clip in the first half of 2021. Those high prices generally translate to elevated costs for a repair (and, ultimately, for insurers), economists said.

Indeed, new and used vehicles were among the first consumer goods to see high inflation that eventually took hold across the U.S. economy (and which now seems to be in retreat).

A “perfect storm” of pandemic-era factors like snarled supply chains and a shortage of auto parts like semiconductors ran headlong into ballooning consumer demand, said Charlie Chesbrough, senior economist at Cox Automotive.

The pace of vehicle sales in March, April and May 2021 was at its highest since the Great Recession, Chesbrough said. The U.S. Federal Reserve had cut borrowing costs to near zero in early 2020, and consumers built up a cash stockpile during the pandemic by staying home and via government relief.

In other words, a ton of consumers wanted to buy cars that were in short supply, driving up prices.

Now, however, the dynamic has somewhat shifted.

To that point, car inventory has partially recovered.

The Fed has raised interest rates aggressively to tamp down inflation, raising borrowing costs and crimping demand, Chesbrough said. Amid those higher rates, manufacturers are using more financial incentives to reduce transaction costs and juice consumer demand, he added.

New vehicle prices have declined for two consecutive months, in April and May, according to the CPI. While falling, they remain 4.7% higher than a year ago.

CPI data indicate that used car and truck prices increased in April and May, but economists think they are poised for an imminent decline. Wholesale used-vehicle prices have fallen by about 6% since March, according to the Manheim Used Vehicle Value Index.

Used car and truck prices are down about 4% in the past year, according to CPI data.