Auto Insurance Market Trends for 2023

JULY 5, 2023

The auto insurance market in the U.S. is facing several challenges, including an increasing number of severe weather events, labor shortages, and inflation. Premiums are also expected to rise by 8.4%, according to a ValuePenguin report.¹ The Insurance Information Institute states that auto policy premiums lagged behind the inflation rate in 2020 and 2021, resulting in increases for 2022 and continuing into 2023.²

Policyholders have three questions:

• What is driving premium increases?
• How can increases be offset?
• When will premiums start to decrease?

Major Cost Drivers of Auto Insurance Premiums

Let’s take a look at three major issues driving auto insurance premium increases in the U.S.

Extreme Weather and Claim Frequency

Severe weather events are on the rise, with 18 separate billion-dollar weather events in 2022, and nine separate billion-dollar natural disasters so far in 2023.³ Major storms across the U.S. have already caused significant damage this year. In April, South Florida experienced a record rainfall of 25 inches in 24 hours — deemed a “1,000-year event” by the National Weather Service⁴ — resulting in urban flooding with over $100 million in damages.⁵ That same month, 29 tornadoes touched down in the southern and central Plains in just one day, causing an estimated $1.9 billion in damage.⁶ June’s destructive hailstorm in Texas produced baseball-sized hail that smashed windows out of homes and vehicles.⁷

Comprehensive auto insurance coverage pays for damage from natural disasters — including floods, hail, tornadoes, and wildfires — in addition to other causes not involving a collision with another vehicle. As severe weather events increase, so do insurance payouts: regardless of whether a policyholder submits a claim, everyone’s premium is negatively impacted.

Labor Shortages

The United States is experiencing a labor shortage that began during the pandemic. While the U.S. Chamber of Commerce reports that 4.5 million jobs were added in 2022, three million more workers are needed to have a comparable pre-pandemic workforce.⁸

This shortage of labor has an impact on auto insurance premiums. Consider this hypothetical: a vehicle needs repairs after a car accident. Under normal conditions, repairs would take a week, but a shortage of mechanics will prolong the claim. This extension may mean the insurance company pays more for the policyholder’s rental vehicle. Multiply this scenario by thousands and thousands of claims: a labor shortage increases rental coverages, which causes claims costs to rise and negatively impacts policyholder insurance premiums.

Economic and Social Inflation

Economic inflation impacts many types of businesses, including the auto industry. According to the Bureau of Labor and Statistics, motor vehicle repair prices have jumped 23% over the past year — a rate of inflation nearly four times higher than overall price increases.⁹ Industry experts say costs are soaring for auto shops due to a shortage of workers and car parts. While inflation may be cooling, these costs remain high.¹⁰

Meanwhile, litigation costs continue to increase, and a contributing factor is social inflation — simply defined as the public’s attitude toward big business. Negative feelings toward insurance companies can cause policyholders to:

• File claims: During periods of high social inflation, policyholders may file claims they would have otherwise handled out of pocket.
• Sue their insurance company: If a policyholder feels dissatisfied with a claim payout, they may sue their insurer, which leads to higher litigation costs.
• Award large settlements: Negative attitudes toward insurance companies may cause juries to award large (or “nuclear”) verdicts, which can result in higher payouts from insurers and an increased likelihood that another plaintiff will file a similar suit, hoping for the same type of verdict.¹¹

How to Offset Increasing Insurance Premiums

There are several ways to offset increases on your auto insurance premiums. If you already have other insurance policies, you may be able to save on your car insurance by bundling your policies with the same carrier. The average driver saves about 16% on their insurance premiums by bundling their homeowner’s insurance with their car insurance, according to the insurance comparison website InsuranceQuotes.¹²

Determining the miles you drive annually can also save you money on your premium. Driving fewer than 7,000 to 10,000 miles a year may produce a “low mileage” discount. According to Insure.com, the average person who drives 10,000 miles a year pays 7% more than someone who drives 7,500 miles a year.¹³ If you work from home, your vehicle can be designated for “pleasure use” versus commuting. Vehicles used for commuting are driven more, which subjects them to greater risk. They are also typically on the road during rush hour, when the risk of accidents increases.¹⁴  

Another way to save money is by paying your auto insurance premium in full, since insurers usually charge fees for installments. Paying upfront could save you as much as 12%, according to car insurance comparison site The Zebra.¹⁵

When Will Insurance Costs Decrease?

Insurance is cyclical, and eventually, the challenges the auto insurance market faces today will lessen. However, premiums may never return to “normal” according to Bill Madison, CEO of insurance at LexisNexis Risk Solutions.

“We believe that much of the claims severity increases that the industry has observed are likely here to stay, and rates are unlikely to drop to pre-pandemic levels,” Madison told Bankrate.¹⁶ “At the same time, we do anticipate that the hard insurance market will eventually soften, and rate increases will become more moderate over time.”

Greg McBride, Bankrate’s chief financial analyst, echoed similar sentiments, saying, “Don’t bet on declining auto insurance premiums. A more modest pace of increases is probably the best we can hope for.”