Why Auto Insurance Premiums Are Rising Faster Than Inflation

In recent years, U.S. auto insurance premiums have been climbing at a pace far exceeding overall inflation, creating frustration for drivers already coping with higher living costs.  Several factors - ranging from vehicle repair expenses to accident frequency - are converging to push rates higher.

One major problem is the surge in repair and replacement costs. Modern vehicles are increasingly equipped with advanced driver-assistance systems, sensors, and expensive electronics. While these features improve safety, they also make repairs far more costly.  A simple fender-bender that once required a few hundred dollars in bodywork can now involve thousands in parts and specialized labor.  At the same time, parts shortages and supply chain bottlenecks have kept prices for replacement components elevated.

Labor costs in the auto repair industry have also risen sharply.  A shortage of skilled mechanics means shops are paying more to attract and retain workers.  These higher wages are passed directly into repair bills, which insurers ultimately must cover.

Medical expenses for accident-related injuries continue to rise faster than the general inflation rate.  Even with improvements in vehicle safety, collisions still produce costly medical claims—particularly in states with no-fault insurance systems, where medical benefits are paid regardless of who caused the accident.

Another significant factor is increased accident frequency and severity.  After pandemic-era lows, vehicle miles traveled have rebounded.  In the US today, we experience more than 36,000 traffic accidents per day, causing about 120 deaths each and every day.  This is about 12% higher than pre-pandemic days.  Distracted driving, often linked to smartphone use, has contributed significantly to this data set.

Finally, insurers must maintain financial stability and regulatory compliance.  State insurance regulators require insurers to hold sufficient reserves to pay claims.  When claim costs rise quickly, companies must seek premium increases to maintain solvency.

The combined effect is a perfect storm: higher claim costs, more frequent severe losses, and structural changes in vehicle technology.  While inflation affects all goods and services, auto insurance is uniquely sensitive to these compounding cost pressures.  As a result, premiums are likely to keep rising faster than the overall consumer price index—at least until repair costs stabilize, accident trends improve, and weather-related losses become less severe.

In short, don’t expect to see lower auto insurance rates anytime soon.  However, there is a trick to get lower rates in the short run.  You see, it costs a lot of money for insurance companies to market to new customers – on average more than $5,000.  And because insurers understand most people HATE shopping for auto insurance, they know once they capture you – you’re likely to stay for several years.

So, to win your business, most insurers will use the first 6-month policy (auto insurers typically 12-month policies to commercial exposures) as a loss-leader – meaning they will give you a discounted rate for the first 6-months.  At your first renewal, it’s no more Mr. Nice Guy, and they slap you with a significant rate increase – often more than 100%.  

If you’re willing to shop around once or twice a year, you can beat the insurance companies at their own game.  But if you do this, you want to make sure you find high-rated insurers with at least an “A” rating from AM Best.  You can check a company’s rating at AM Best online.