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Increased auto insurance hampers fight against inflation

by SuperiorInvest

Job growth, wage growth and business growth are all buoyant, and inflation has fallen sharply from its 2022 highs. But consumer confidence, while improving, remains sour.

One reason may be the shock caused by some very visible prices, even as overall inflation has calmed down. The cost of car insurance is a key example.

Motor vehicle insurance increased 1.4 percent monthly in January alone and has increased 20.6 percent over the past year. the biggest jump since 1976. It has been a huge success for those who drive the approximately 272 million private and commercial vehicles registered in the country. And it has helped temper the “mission accomplished” feeling about inflation that was bubbling in the markets at the beginning of the year.

According to a recent private sector estimate, the average annual premium for full coverage auto insurance in 2024 will be $2,543, compared to $2,014 in 2023 and $1,771 in 2022.

That increase has a variety of causes, but the main one is simple: cars and trucks are more expensive now, so insurance for them is too.

The cost of buying and owning a vehicle makes up a substantial portion (about 10 percent) of the entire Consumer Price Index used to track U.S. inflation. From January 2020 to January 2024, the cost of a new vehicle increased more than 20 percent and the cost of used cars increased even more, while overall vehicle repair increased 32 percent. The shortage of computer chips and other supply chain problems had a brutal impact on auto production and created bottlenecks that raised purchase prices, which in many cases have not fallen.

In that context, the increase in auto insurance premiums of about 40 percent since December 2019 “seems reasonable,” said Mark Zandi, chief economist at Moody's Analytics.

Insurers are for-profit companies whose goal is to cover the cost of a wide range of incidents. So when their potential liabilities increase, companies say premiums must also increase so that expenses don't exceed their income.

As recently as the fourth quarter of 2022, large underwriting losses caused Allstate to post a net loss of $310 million, even though it had raised premiums.

“The classic example is that, you know, a bumper used to be a cheap replacement part, and that's not the case anymore because it has advanced sensors in there; that makes it a pretty expensive proposition,” said RJ Lehmann, lead researcher. at the International Center for Law and Economics, a nonpartisan research center.

Companies have also reported more, and more serious, accidents resulting in greater bodily injuries and property damage, as well as higher medical payments, all of which insurers may be required to cover depending on the scope of the policy. which hurts net income margins.

“Insurers are taking this on,” said Sonu Varghese, macroeconomic strategist at Carson Group, a financial firm. “I'm sure there's some good old-fashioned margin protection going on as well.”

Another force prompting insurers to raise premiums was the rapid increase in interest rates that the Federal Reserve initiated in 2022. To smooth out returns and cash flow, insurers often reinvest their profits. In 2021, insurers had a lot of assets that would lose value if short-term interest rates rose. When those interest rates quadrupled, many insurers' balance sheets were left bleeding. (Now, however, these insurers have the benefit of reinvesting leftover cash at new, higher rates.)

In recent months, commercial movements on Wall Street and estimates by industry analysts indicate that large insurers have completely changed the situation.

Shares of Travelers and Allstate hit record highs after the companies announced another round of premium increases that are expected to cover billions of dollars more than the annual claims they expect to pay. Shares of Progressive, known for its commercials with fictional saleswoman Flo, have soared nearly 20 percent since early January, boosted by a similar anticipated improvement in profit margins.

Many economists aren't worried that auto insurance alone could play a prominent role in any revival of overall inflation, but it was a major reason price increases slowed less than analysts expected. last month. (Motor vehicle insurance most recently contributed more than half a percentage point to the inflation rate. Excluding it would have put headline inflation just half a percentage point short of the Fed's desired 2 percent pace.)

Samuel Rines, a market economist and author who closely follows the balance sheets and pricing decisions of large companies, called the premium increase a “legitimate cost hedge,” in line with most analysts. However, he noted that it had come “with a delay” to most corporate price increases.

That delay has frustrated those who have already endured a series of price shocks. And it has attracted the attention of consumer watchdogs who see the recent increases as an opportunistic and especially aggressive use of run-of-the-mill “cost-plus” pricing models.

Critics such as Hal Singer, an economist at the University of Utah, who calls the recent increase in premiums “ridiculous,” point out that consumers are legally required to buy auto insurance and their ability to shop for the best plan when limited is limited. limited. All major providers are raising premiums around the same time and announcing more to come.

According to an estimate from Insurify, an insurance comparison website, the cost of auto insurance will rise an additional 7 percent this year.

On a quarterly earnings call, Allstate executives said they were not done with premium increases in several states, but were sensitive to pushing customers too hard and potentially losing them to competitors that might stop first on escalating rates. .

“As more states get into the right zone from a margin perspective, we would expect the amount of rate we need to take in those states to decrease,” Mario Rizzo, president of property and liability, said on the call. “But having to accept a lower rate is a good thing from a retention perspective, and we will continue to focus on that.”

Several leading voices at major banks are telling their clients that, while the coming waves of inflation will be rough, a general disinflationary trend still persists, with relief just around the corner for consumers and those hoping for relief. Federal Reserve will lower rates sometime this year.

“While further outsized increases in insurance are likely in store, a sharp drop in year-over-year growth would appear inevitable,” David Kelly, chief global strategist at JP Morgan Asset Management, said in a recent note.

“Once it starts,” Kelly added, “it should become the gift that keeps on giving.”

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