Auto insurance keeps inflation high, holding consumers 'captive'

According to the US Bureau of Labor Statistics, auto insurance has risen over 20% from a year ago, the largest jump since 1985. Consumer Federation of America Director of Insurance Doug Heller joins Yahoo Finance to contextualize the spike in auto insurance prices.

Heller outlines how the moment inflation hit and repair costs rose, insurance providers enacted "aggressive" rate hikes: "These rate hikes that get put into place, they roll out over the course of policy years. We have people who still haven't even seen the rate hikes that were announced in, say, January, December, even back into November, because their policy hasn't renewed yet. I expect that we're going to see another at least six months of people feeling the rate increases that have been announced over the last several months, before we even begin to see relief. Perhaps more of the problem is that the insurance industry kind of is in charge here. Because they've got the captive market of consumers, we find they're really slow to pull back on their rates. "

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Editor's note: This article was written by Nicholas Jacobino

Video Transcript

AKIKO FUJITA: Well, the cost of driving remains high, according to the latest CPI report from the Bureau of Labor Statistics. Auto insurance prices remained up by 20.6% from a year ago in February, the largest jump in government data going back to 1985. For more on what this means for consumers, we're joined by Doug Heller, Consumer Federation of America director of Insurance.

Doug, good to talk to you today. You know, I'll admit, yesterday, when I saw that CPI print, specifically on transportation services, it made me do a double take because of just how high the jump has been. What's been driving those price gains?

DOUG HELLER: Well, it's a series of things, some of which are expected. The supply chain crisis coming out of the pandemic created some difficulties, especially for new vehicles. Repair costs have been going up.

But as you just showed, those numbers are starting to come down. And there's not nearly as high as inflation. And what's happened is the insurance companies have fallen behind the inflation curve.

And they like it they're, right, because they're setting their rates as though inflation were still at that level that we were seeing in 2022 and in the beginning of 2023 when they were really skyrocketing throughout all industries. But as other inflation has come down, they've kept those premiums high. And those high premiums are still flowing out into consumer pockets.

We've seen an additional tens of billions of dollars in consumer premiums for auto insurance over the last 18 months or so. And it really doesn't fit with where the direction of inflation is going. But with insurance, you know, it's not really a competitive market in the same way that most others are.

Consumers have to buy the product. We're stuck with whatever they give us. And so as a result, we're seeing this kind of misalignment between what the insurance industry is doing and what the rest of the economy is showing.

RACHELLE AKUFFO: So then, Doug, at what point then could we expect some sort of normalization when the lag that we've seen with auto insurance catches up with the rate of what we're seeing with everything else starting to decline as well?

DOUG HELLER: Well, that's one of the real big problems that consumers face because these rate hikes that get put into place, they roll out over the course of policy years. So we have people who still haven't even seen the rate hikes that were announced in, say, January, December, or even back into November because their policy hasn't renewed yet. So I expect that we're going to see another at least six months of people feeling the rate increases that have been announced over the last several months before we even begin to see relief.

But perhaps more of the problem is that the insurance industry kind of is in charge here. And because they've got that captive market of consumers, we find that they are really slow to pull back on their rates. And, you know, this is kind of in sharp contrast to what we saw during the pandemic.

Everybody remembers being stuck at home and not driving. We weren't crashing cars either. But other than a little bit of a give-back that the insurance companies provided right at the beginning of the pandemic when they gave back 10%, 15% of a month's premium or two, they really did not lower rates, not significantly, when things were going really well for them.

But the moment that inflation hit, with those supply chain problems and repair costs going up, they were very aggressive and very quick with rate hikes, these extremely high rate hikes that we've not ever seen before. As you pointed out, this is some of the highest inflation in a generation. And so they were really slow to give back money when things were really going well for them.

They've been really aggressive to take money in the intervening years as things have gone up. And another reason to add to this is that they had a bad year on the stock market in 2022 with the rest of everyone, of the world, right? And their investments are such a key driver of profitability that, you know, they take our premium-- they call it the float.

They take our premium, and then they invest it. But when they have a bad year, then they need to go grab more premium. So it's sort of their bad luck in the market, bad decisions, bad investments, you know, they weren't alone in that, but that also has been a driver of things. And so they've been trying to capture back a lot of the losses on our premiums.

AKIKO FUJITA: So, Doug, we're talking about six more months of rate hikes, or at least elevated rates, for insurance. What does that ultimately mean for the consumer? We've already heard reports of drivers who are saying, well, if that's the case, I can't afford insurance, even though I still need to drive.

DOUG HELLER: Well, that's really what's really concerning for us at the Consumer Federation of America and for anybody who's getting on the road to drive. You know, with cost of insurance going up, people have to make these really tough decisions because you're required to buy insurance, but you've got all these other costs. And if you're a sort of moderate-income person, and you see these 15%, 18% rate hikes on your monthly insurance bill, you're starting to make decisions.

Sometimes, you're cutting back on the coverage that you have. So you might not have coverage if your car is stolen because you get rid of that comprehensive coverage. Or you may have lower liability limits, so you may not be able to pay for enough of a crash you caused.

But even worse still, we're really concerned that we're going to see an escalation of uninsured driving in America. So either people are going to be, you know, reducing their coverage, which is going to potentially hurt them, or they're going to be going uninsured, which not only puts them at risk of being, you know, being held criminally liable for driving uninsured, but puts everybody else at risk for crashes that go uninsured. And when that happens, that means, you know, all of us pick up that cost either in our own insurance premiums or taxpayers pick it up in public health costs.

So either way, this is a vicious cycle of when insurance rates go up. And the fact that they're going up beyond what they need to be now, that they haven't slowed down when they should have is a real testament to the weakness of the regulators, who really are supposed to be protecting consumers from exactly this kind of a problem. So we have a situation right now where consumers, customers of insurance companies, are really in crisis.

And we're hearing from people all around the country about this. And at the same time, if you look at several of the companies, Allstate, Progressive, travelers have seen all-time stock market highs over the last month. So there's a real problem when the companies are seeing stock-- you know, share price, you know, tipping-- or, you know, top and at the bottom are consumers who are struggling with the prices.

And that's the real problem that we're facing. And we're really worried about what happens on the Street when people are driving uninsured.

RACHELLE AKUFFO: It's true. It's certainly a decision you don't want to have to make between being able to protect yourself and your car in situations like that. Perhaps it will draw the eye of the Biden administration, who's also been very focused on some of these inflated prices in other industries as well.

Appreciate you taking the time to join us. Doug Heller, Consumer Federation of America director of Insurance, we appreciate your time this morning.

DOUG HELLER: Thanks for having me.