"Shocking Truth Revealed: The Real Reason Behind Skyrocketing Auto Insurance Rates!"

The factors are partly structural, but also relate to the company's drive for profit and use of technology to target customers with precision.

Source: Google.com/Car-Insurance.jpg

As my colleague Bob Kuttner explains, yesterday's inflation print is actually a tale of two readings. The overall figure showed only a slight moderation in price increases and the topline figure remained above the 2 percent target set by the Federal Reserve. But if you dig into the data, you can clearly see that some price sets are actually driving the lion's share of the price acceleration, while most others are quiet. For example, food prices, which once soared, have been essentially flat over the past few months, as consumers switch to cheaper brands and companies adjust prices to win them back.

Prices still rising quickly have a lot to do with structural factors rather than an overheated economy that requires high interest rates to slow things down. In the case of rents and the cost of owner-occupied housing (known as imputed rents), supply constraints have led to price inflation, and if anything, that inflation is actually exacerbated by high interest rates, because they raise the cost of financing a home purchase. Simply put, the Fed is hurting, not helping, efforts to lower inflation with its interest rate policies.

But the real uncontrolled price in the economy, relative to everything else, remains auto insurance. There was a 22.6 percent increase in car insurance costs over the past year, the fastest increase in half a century. (It's worth noting that there is a different reading for auto insurance in the personal consumption expenditures reading, which makes price acceleration look much slower. That's how it is.)

Vehicle repair costs are also rising, and it makes sense that the two readings would move together. If it costs more to repair your car, the company will likely charge more to insure it. Part of this reflects shifts in the automotive industry and specifically the business model for car dealers. But there are a number of factors, including the potential for insurance company price coordination and efforts to generate lower revenues from the pandemic. Without federal legislation to fix this, auto insurance company patchwork regulations will likely make this an ongoing trend.

You may remember getting a rebate during 2020 from your auto insurance company; I know I did. When substantially fewer people drove during lockdown, accident claims fell sharply. You probably won't be surprised to learn that these rebates, mandated by state law but precisely calculated by the auto insurance companies themselves, are less than what customers deserve, according to consumer groups. “Excess premiums” in 2020 totaled about $42 billion, but premium rebates totaled only $13 billion.

We're basically back to normal now as far as driving is concerned. However, two things are clearly not normal: the quality of driving on the road, and the complexity of repairing more technologically advanced cars. I don't need to tell anyone who has sat behind the wheel over the last few years that you are driving with a bunch of maniacs, and if you don't think so, you are that maniac. Traffic deaths reached a 16-year high in 2021, and accidents per million residents increased consistently. Car thefts have also gone up in recent years, although they are now down.

The second factor is that vehicles are more difficult and more expensive to repair. Part of this is supply chain shortages for auto parts and labor, but we've worked through most of that. There are a lot of computer chips and sensors in today's vehicles, and you need a lot of skill to know how to repair them.

This intersects with the fact that service is a big part of how car dealers not only make money but also hook customers into staying with them. The rise of electric vehicles has upended many of these business models: They don't require oil changes (although sometimes dealers will sell people oil change packages on EVs) or the regular maintenance that gas-powered vehicles require. That means fewer recurring costs for dealers on EVs, which can only be made if they overcharge for repairs. And that creates a vicious cycle, where higher repair costs lead to higher insurance costs.

An additional problem is climate change, which has created more extreme weather events such as hurricanes and floods. Like other property, cars can be totaled in this event. That won't change, and will probably permanently push up price levels for all insurance (home insurance in particular).

But even if potential costs are high, actual costs for insurers appear to be falling, at least according to insurance industry earnings reports. Geico, the leading auto insurance company owned by Warren Buffett's Berkshire Hathaway, is on track to record profits, thanks to higher premiums and fewer claims. Profits also rose for Allstate and Progressive. That illogical scenario has sparked interest from economists such as Hal Singer of the University of Utah and EconOne.

In The New York Times, Emily Flitter argues that the paperwork is largely a matter of. State insurance regulators regulate auto insurance rates, and they require large amounts of data to justify increases. Insurance companies made a lot of interest rate inquiries in 2021, as people emerged from lockdown and started bumping into each other, and deposits emerged. This has caused some insurance companies to duck out of the market, and fewer options have led to higher premiums, according to this read.

But Singer argues that the industry actually coordinated these increases, essentially distracting regulators from raising prices. Additionally, it looks like the insurance company is trying to make up for losses over the previous few years. An industry analyst claims that there is a loss of $33 billion in 2022 and $17 billion in 2023.

Singer said Wednesday that this assumes some natural right to profit. "Prices in a competitive market — and this is clearly not one — are anchored at current marginal costs. No company is guaranteed profits all year round," he wrote.

This could also be another area where the Federal Reserve's interest hikes may have exacerbated the problem. Insurance companies invest premiums as “float” before they have to pay back claims. When interest rates start to spike, insurance companies are caught short by investing in long-term securities that end up losing money. In other words, the industry's losses on the one hand have nothing to do with higher costs for car repairs, but rather with their own bad investment strategies.

Those investments have now largely shifted to higher-yielding products, calling into question the need for these massive interest rate increases. And that explains why Geico and other companies are enjoying record profits right now.

Adding to this disconnect is the fact that car insurance companies track you and monitor your driving habits. Internet-enabled features in newer cars collect data that is pushed to data brokers and ultimately insurance companies. This could lead to a new business model of “usage-based insurance,” where prices are tied to driving behavior. Risk-based pricing may sound fair, but surveillance can be secret, leading to people who are considered bad drivers getting skyrocketing raises without knowing it's because they're being spied on.

There are essentially no current regulations on automated data collection, and some lawmakers would like to see a framework put in place. “Automakers face few, if any, restrictions on the collection, use, and disclosure of this data,” wrote Senator Ed Markey (D-MA) to the Federal Trade Commission. "Consumers are often left in the dark."

None of the factors behind the rising cost of car insurance have anything to do with government spending or other usual suspects. But it seems the Fed's rate hikes are painful, or at least they have been in the past. And there's at least some reason to suspect that auto insurance companies are in pretty good shape despite continuing to raise premiums. This suggests that monitoring corporate behavior and personal privacy means more about fair prices than exhausting debates about whether the economy is overheating.

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