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CNBC: Auto Insurance Rates Rise, but Insurers Could Still Get Squeezed by Higher Costs Ahead

Source: Contessa Brewer, CNBC

Key Points:

  • The latest CPI showed the auto insurance prices up 16.9% in May, following a 6.4% increase in April.
  • Those increases only bring premiums back in line with pre-pandemic levels.
  • Auto insurers are facing cost challenges including a return to driving, higher repair costs and delays in repair time due to chip shortages, supply chain disruptions and a labor crunch.

Despite recent increases in auto insurance rates, the market is still soft, according to Elyse Greenspan, a managing director at Wells Fargo.

“The increase sequentially was very modest,” Greenspan said in an interview. “The reason why there was a strong increase year over year is because the premium base in May 2020, was impacted by all the refunds.”

As the amount of driving consumers did fell, auto insurers refunded $14 billion in premiums last year, according to the Insurance Information Institute. Rates continued to stagnate, or even decline, through the first quarter.

However, the most recent consumer price index data showed the auto insurance index up 16.9% in May, following a 6.4% rise in April — the first increases since March 2020.

Auto insurers are facing a number of challenges as the economy reopens. Workers are returning to offices and vaccinations are prompting many people to take summer vacations. Government data from March, the most current statistics available, show driving up 19%.

The result of people returning to pre-Covid driving levels means the rate of car accidents will rise, according to Michel Leonard, III vice-president.

If this year’s trend follows last year, the accidents may also be more severe. Though the number of driving hours plummeted by 13% last year, fatalities climbed 7%, according to the National Highway Transportation Safety Administration. Experts blame a higher incidence of speeding, impaired driving and distracted driving for the increase.

Also, Leonard said, many drivers are out of practice, especially at parking or navigating through traffic.

More accidents mean more claims — and those claims are expected to be more expensive for insurers to pay because repair costs are rising.

The CPI data has shown month after month of gains for auto repairs. The 2.8% increase in May was a bit slower than in the pace of prior months. (Repair costs climbed 3.5% in April and March, 3.1% in February and 3.5% in January.) And wait times are also longer thanks to chip shortages, supply chain disruptions and a labor crunch.

Still, not all insurers are raising rates. In a Wells Fargo analysis, Greenspan said the Hartford and Allstate raised rates in May, but Travelers, Progressive and State Farm saw rates decline. Geico increased rates in April, but didn’t file rate changes for May, he said.

“It’s still a good environment for consumers who are purchasing auto insurance,” Greenspan said.

She anticipates the environment will remain tough for auto insurers through fall as commuters return to work, students head back to school and people who took mass transit before the pandemic opt to switch to driving themselves.

“There’s just a lot of headwinds from a severity and a frequency perspective,” she said.

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