Why Do Auto Insurance Rates Rise?

Vehicle owners understand that their personal driving record, the type of vehicle they drive and how much they drive influence the cost of auto insurance. Yet rising medical costs, sharply higher vehicle repair costs and soaring jury awards in vehicular liability cases are the principle drivers behind higher auto insurance rates today. In several states, fraud and abuse is pushing up the cost of auto insurance. Medical costs are an important factor in the cost of auto insurance. Each year there are more than two million car accidents involving injuries. Several people are often injured in the same accident. Typical costs for treating an auto accident victim range from $6,000 to $9,000 but can easily run into the tens of thousands of dollars. The cost of auto injury claims is rising by as much as 30 percent in some states. The $15 billion to $20 billion that auto insurers pay in medical claims each year are a very significant component of auto insurance costs and the upward trend in claims costs is an important cost driver in auto insurance today. Higher costs for hospitalization and pharmaceuticals, state regulations permitting a wide range of dubious treatments and associated legal costs are largely to blame. Higher repair costs are another significant cost driver today. A recent court decision essentially forced many insurers to suspend their use of aftermarket (generic) crash parts in automobile repairs, giving manufacturers of name-brand parts a virtual monopoly in this multi-billion dollar market. In the year following that decision, the pace of increase in the cost of motor vehicle body nearly tripled. The effective prohibition on the use of generic parts—which are of like kind and quality to name brand parts—in the repair of damaged vehicles is a factor that could ultimately add $4 to $5 billion annually to the cost of automobile insurance. Name brand parts often cost 30% to 70% more than their generic equivalent. Another court in late 2001 reached an equally unfriendly consumer decision that could have the effect of reaching deep into the pockets of drivers. The Georgia Supreme Court ruled that insurers must compensate drivers for the so-called diminished value that occurs when a car is involved in an accident, even if the car is completely repaired and functions normally. The theory is that a car involved in an accident is always worth less than one that has not, even if repaired to its pre-loss condition. Auto dealers claim that diminished value for cars involved in accidents is typically 10% to 15% of the vehicle’s resale value. If insurers must pay out an additional 10% to 15% on each claim, then clearly the cost of insurance must reflect that fact. Sharply higher jury awards in vehicular liability cases are putting additional upward pressure on auto insurance rates. The average jury award in auto liability cases rose from $187,000 in 1994 to $269,000 in 2000—an increase of 44%. Auto liability issues are much more important than people realize. About 60% of auto premiums paid in 2000— nearly $70 billion—were for liability coverages. Fraud and abuse are major problems in some states, such as New York, Florida and Massachusetts. Loopholes in New York’s no-fault insurance statutes, for example, are costing the state’s drivers nearly $2 million per day.
Source: NAIC, Insurance Information Institute.