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Why auto insurance costs are rising at the fastest rate in 47 years

As car prices moderate from a pandemic-era surge, insurance has pushed the cost of car ownership to the brink for many Americans.

New data out on Wednesday from the Bureau of Labor Statistics showed auto insurance costs last month were 22.2% higher than they were a year ago and increased from February's 20.6% year-over-year gain. March's rise in insurance costs is the largest gain since December 1976, when prices rose 22.4% over the prior year.

The sticker shock hitting many American drivers is being driven by a rise in accidents, the severity of accidents, and geographical factors combining to create a perfect storm and push costs higher.

'Severity' and bodily injury claims on the rise

The most alarming factor driving insurance costs higher is more severe claims.

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"In general, the numbers of crashes, injuries, and fatalities are up, and inflation has made the cost of repairs more expensive," AAA spokesperson Robert Sinclair told Yahoo Finance.

Sinclair said motorists developed "bad habits" on the road during pandemic lockdowns, contributing to current behavior. For example, as the New York Times reported earlier this year, researchers in Nevada discovered that during the pandemic, motorists were speeding more (and driving through intersections), seat belt use was down, and intoxicated driving arrests were up to near-historic highs.

Read more: Tips for getting cheap car insurance

Sinclair also pointed to NHTSA data, which found that in 2021, at the height of the pandemic, road fatalities increased by 10.5% to their highest level since 2005, even while most Americans stayed at home. The NHTSA said it was the highest percentage increase it had ever seen. The agency found that fatalities in 2022 only decreased by 0.3% as compared to 2021.

Insurance tech firm Insurify found that auto insurance premium hikes were "largely due to the skyrocketing price of auto parts and the increasing number and severity of claims." And while increases may moderate, analysts still believe further premium hikes are on the horizon.

"While the magnitude of rate increases is likely to ease somewhat, after several years of double-digit increases, some lingering claim cost inflation and adverse claim severity and frequency will likely lead to a 'higher for longer' auto rate environment,” CFRA analyst Cathy Seifert told Yahoo Finance.

Not surprisingly, severe accidents leave insurance companies with rising loss ratios, or a share of premiums collected that insurers paid out in claims.

"Broadly speaking, severity in [the] auto [business] is running mid- to high-single digits — think closer to mid in the vehicle severity, think closer to high in bodily injury — and so that's sort of where trends are running today," Travelers (TRV) personal insurance president Michael Klein said during the insurance giant's latest earnings call in January.

"We've seen a bit of a mix shift towards more bodily injury claims, which is one of the things that has us keeping our severity trend estimates at that sort of elevated level," Klein added.

In response, Travelers increased premiums, especially for customers renewing their policies. In the fourth quarter, its renewal premium price change was a whopping 16.7% in its auto business, contributing more than $2 billion of additional premium into the segment compared to the same quarter last year.

GEICO, the insurer owned by Warren Buffett's Berkshire Hathaway (BRK-A, BRK-B), also felt the effects of those rising severity claims.

The second-largest auto insurer in America behind only State Farm, GEICO was hit by six consecutive quarters of underwriting losses beginning at the height of the pandemic. The company has since responded with more aggressive policy writing, trimmed marketing budgets, and higher premiums.

GEICO eventually earned $3.64 billion before taxes from underwriting in 2023, but the trend of higher severity of claims remains.

OMAHA, NEBRASKA - APRIL 30: Shareholders pose for a picture with a Geico mascot at the Berkshire Hathaway annual shareholder's meeting on April 30, 2022 in Omaha, Nebraska. This is the first time the annual shareholders event has been held since 2019 due to the COVID-19 pandemic. (Photo by Scott Olson/Getty Images)
Shareholders pose for a picture with a GEICO mascot at the Berkshire Hathaway annual shareholder's meeting on April 30, 2022, in Omaha, Neb. (Scott Olson/Getty Images) (Scott Olson via Getty Images)

"Average claims severities continued to rise in 2023 due to higher auto repair parts prices, labor costs, and medical inflation," the insurer said in parent Berkshire Hathaway's 2023 annual report, despite the frequency of claims coming down for property and auto claims.

GEICO said, "Average claims severities in 2023 were higher for all coverages, including property damage (14-16% range), collision (4-6% range), and bodily injury (5-7% range)." GEICO also sought rate increases in numerous states in 2022 and 2023 in response to accelerating claims costs.

On the flip side, insurer Progressive (PGR) noted in its latest earnings report that the severity and frequency of claims were coming down, suggesting some relief for the insurer's bottom line and perhaps consumer wallets.

"Severity seemed to moderate a little bit [in Q4], and so we're hoping that it's a little bit benign," CEO Tricia Griffith said in Progressive's fourth quarter earnings call. "When you look at last year, we were affected by fixing cars, and that seems to be a little bit calmer."

Complex repairs, rising labor costs

As bodily injury and property damage costs rise, so too have the incidence of more complex repairs and the need for more expensive mechanics to get them done.

New vehicle prices have risen over 20% since 2019, leading to an increase in the cost of parts. Additionally, newer cars contain more technology, such as sensors and control modules built into bumpers and exterior panels, which makes a simple fender bender a potential several-thousand-dollar repair.

And like almost all industries since the pandemic, the cost of labor has risen dramatically as well.

"Within auto repair, most of our expenses are human beings, and as minimum wage laws come into effect, that pushes the cost of labor up," a general manager at a major Southern California-based auto dealer told Yahoo Finance.

LOUISVILLE, KY - JANUARY 13: An auto mechanic walks under a vehicle being repaired from a lift at Gates Automotive Service on January 13, 2022 in Louisville, Kentucky. Due to the global supply chain slowdown and labor shortages, many shops around the US are experiencing difficulty ordering parts and fulfilling service requests. (Photo by Jon Cherry/Getty Images)
An auto mechanic walks under a vehicle being repaired from a lift at Gates Automotive Service on Jan. 13, 2022, in Louisville, Ky. (Jon Cherry/Getty Images) (Jon Cherry via Getty Images)

A lack of supply of technicians that handle the most complex repairs has also pushed costs higher. "To give you some perspective, I have transmission technicians and diesel technicians that make $200,000 a year," the general manager said.

The number of workers employed in the motor vehicles and parts industry fell more than overall employment during the pandemic, dropping almost 40% from peak to trough. And while employment in this industry has since surpassed pre-pandemic levels, it took until August 2022 to recover.

Another issue for dealers and the service business is the rise of electric cars.

While the rate of service for EVs is lower, EVs have a "much higher magnitude" of costs, the general manager said, when it comes to body or structural repairs. EVs also tend to require a more advanced tech solution, requiring even more specialized technicians in an even shorter supply.

Read more: Are electric cars more expensive to insure?

Griffith, Progressive's CEO, for her part noted that garage labor fees were still rising, saying the company's auto parts inflation was "nearing zero," but that auto services inflation was still rising by "mid-single digits."

Weather catastrophes 'are not going away'

Where you live also plays a big factor in what you pay to insure your vehicle: Severe weather in states like Florida, Louisiana, and South Carolina has drivers paying premium costs that exceed the national average.

In Louisiana, auto insurance costs are the highest in the nation on a per capita basis, with 4.7% of the median household's income going toward car insurance, Insurify noted.

In Florida, what Insurify called "rampant" insurance fraud, along with natural disasters, pushed premiums up to nearly $3,000 a year on average.

"The average full-coverage insurance rate in Florida is $243 per month, influenced by severe weather events that strain the state’s insurers," Insurify's report said. "In 2022, Hurricane Ian caused $109.5 billion worth of damage in Florida, making it the costliest hurricane in the state's history, according to NOAA."

Insurers and policyholders did get a respite in 2023 with a relatively calm hurricane season, but there's no expectation that a repeat will happen in the years ahead.

"While 2023 results benefited from the lack of a record-breaking catastrophe (such as Hurricane Ian), catastrophes and volatile and outsized weather patterns are not going away," CFRA's Seifert said.

This post was originally published on March 16, 2024, and updated to reflect new inflation data.

Pras Subramanian is a reporter for Yahoo Finance. You can follow him on Twitter and on Instagram.

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