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Car Insurance Rates 2018: Why are Prices Increasing?

Personal auto insurance policy with small toy car

Drivers across the country should prepare for increases in car insurance rates in 2018 due to a “perfect storm” of events that are causing insurance companies to have significant losses. Rates have been on a steady increase for several years, and 2018 will not be an exception to this trend, even if you are a good driver.

What is Causing Car Insurance Rates to Increase?

Most large auto insurance companies have spent more money than they have earned in the last three years, which is measured by their “combined loss ratio”. When this value is greater than 100%, more money is paid out in claims and expenses than is brought in via policy premiums.

The 2017 combined loss ratio for personal auto insurance is projected to be 105.9, which means companies will most likely adjust rates upward in 2018 to make up for larger than expected losses.

Despite consistent rate hikes over the last few years, companies that cannot keep up with the pace of expenses include State Farm, Allstate, Travelers, and The Hartford. Direct writers like GEICO and Progressive have fared better with small underwriting profits, but rising expenses are reducing profits to a thin margin.

Here are the major contributors to higher car insurance rates in 2018:

  1. Increased weather claims in 2017 – Hurricane Harvey in Texas, Irma in Florida, wildfires and flooding in California, and tornadoes through the Gulf states and South Carolina, all contributed a record year of losses. Hurricane Harvey alone is estimated to have caused over $190 billion in damage alone, with over 1 million vehicles destroyed. Hurricane Michael destroyed entire towns in the Florida panhandle, causing an estimated $8 billion in insured losses.
  2. Low investment returns – Insurance companies rely on investment income to help offset expenses, and low investment yields have contributed to profitability issues. A bump in interest rates after the presidential election has subsided, and companies have seen yields on 10-year Treasury notes decline to a paltry 2.34%. The Dow Jones Industrial average has recently given back all of 2018’s gains, which could result in a net loss for the year.
  3. More miles driven – When gas prices were at record highs a few years ago, the number of miles driven declined substantially, as did the number of accidents and claims. 2010 saw a low of 2.95 trillion miles traveled along with a corresponding dip in accidents, fatalities, and car insurance rates. As gas prices declined, drivers returned to the roads in record numbers, resulting in over 3.2 trillion miles driven in 2016. Accidents increased and car insurance companies were not prepared for this spike in claims, resulting in the higher rates over the last few years. Low fuel prices continued in 2017, as did the record number of miles traveled.
  4. Higher repair costs – Cars are safer now than they were even just five years ago, as manufacturers add many high-tech features like lane departure warning, collision avoidance, backup cameras and sensors, and adaptive headlights. But when those features are damaged in an accident, it costs more to repair them. The average cost of a collision claim has risen 38% in the last 10 years to an average of $4,047 according to IIHS.
  5. Distracted driving and cell phone use – Traffic fatalities surged to over 32,000 in 2016, with over 10% of these being contributed to distracted driving. Almost 400,000 people were injured in distracted driving accidents. Despite the increase in hands-free device usage, there are more touchscreens and distractions in vehicles now than ever before. The National Highway Traffic Safety Administration estimates that over 660,000 people drive distracted on a daily basis.

Comprehensive Insurance Rate Increases

As auto insurance companies begin to file rates with state insurance departments for 2018, we are already seeing significant increases in rates, especially for comprehensive coverage in states that have been impacted by weather-related claims.

Damage caused by flooding, tornadoes, wild fires, and hail are all covered by comprehensive insurance, and claims for these losses were up substantially in 2017. Weather-related losses are forecasted to decrease in 2018, but just one event like Hurricane Harvey can wipe out an entire year of profit for many insurers.

Liability Insurance Rate Increases

The increase in traffic fatalities and injuries from more drivers on the road, as well as more miles driven, is resulting in higher liability, medical, and uninsured/underinsured motorist coverage rates. Insurers are seeing not only higher frequency of liability claims, but also more severity, as bodily injury claims increased 7% in severity in just two years from 2014 to 2016.

2018 will be no different from past years, and an increase in both frequency and severity of liability losses is expected. This will most likely result in cost increases continuing into 2019 and beyond.

Collision Insurance Rate Increases

More expensive vehicle repairs is resulting in higher rates for both comprehensive and collision coverage. Collision loss costs began increasing sharply in 2013, and have continued rising since. 2013 saw loss costs increase 6.6%, 2014 was 5.8%, and 2015 resulted in another 6.6% increase.

Until the frequency and severity of collision losses decreases, along with the cost to repair these claims, the cost of collision coverage will continue to increase.

The Road Ahead

2018 is expected to be an uneasy year for the auto insurance industry, as they attempt to return to profitability. Low interest rates, higher incidents of claims, and catastrophic weather events all contribute to the current state of the industry. Drivers will continue to pay higher prices for insurance until these forces cease pressuring insurers’ bottom lines into the red.

New technology and more efficient claim settlement is helping auto insurers reduce costs and improve customer service, but in the end, a reduction in claims is the only way drivers will see lower car insurance rates in the years to come.

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