Earlier this month, TikTok user Kayla Lee Mills uploaded a soon-to-be viral video to her account. “I guess I’m about to be a carless girl,” she begins, “What the f**k is going on with the car insurance rates in the United States right now?” 

The video garnered 500,000 views. In the more than 5,000 comments it generated, a chorus of voices echoed her frustration. 

Indeed, what the heck is going on with car insurance? As of May, motor vehicle insurance has skyrocketed 20.3% year-over-year. It’s so high, it’s one of the factors contributing to overall inflation, preventing it from cooling more quickly. It’s so high, Kayla Lee Mills decided it would be cheaper to Uber to and from work every day. 

So what’s going on? Let’s get into it. 

Three words for you: Consumer Price Index (CPI)

The thing is, everything is more expensive right now, from groceries to event tickets to cocktails at the bar. The car industry has been impacted by these increases across the board. And it’s significantly more expensive than ever to repair a car should it get damaged. 

Supply chain shortages have made it more difficult to obtain parts. Mechanic wage increases are also contributing to these rising costs. And then there’s the fact that newer cars are highly computerized, which means they have a lot of expensive sensors, chips, cameras, and technologies that can be damaged, in addition to the traditional hardware. 

New manufacturing processes have made it easier to produce cars that have fewer parts, but those few parts are usually really large and harder to replace. If you are in an accident driving a newer model, it may make more sense to buy a new car rather than repair it, which is more expensive for the insurer.  

All of this contributes to the calculations insurance providers make when they determine car insurance prices. 

A regulatory paper jam

According to the New York Times, there’s another reason insurance premiums have soared: slow bureaucracy.

The TL;DR is this: Insurers have to ask state regulators before they raise insurance prices on consumers, in a process called a “rate filing.” State regulators then assess a mass of data to determine whether the raise is fair or not. This data includes, among other things, loss trends, replacement costs, and profits. 

If regulators decide that car insurance premiums are too high, they can force insurers to return money to the consumers, which is what happened during the pandemic. 

People weren’t driving as much, which means there weren’t as many ‌accidents, which means there weren’t as many claims to process. During the pandemic, car insurers were forced to return almost $13 billion to consumers. 

However, this statistical anomaly made it complicated for insurers to predict loss trends for the future. Which means they couldn’t submit new rate filings. When they finally could submit new rate filings, in 2021, they overwhelmed state regulators with paperwork, and produced a backlog. 

State regulators didn’t start approving rate filings until the next year. The average wait time for a rate filing approval increased dramatically, and exceeded six months, which is the length of a typical car insurance policy.  

Meanwhile, in the wake of the pandemic, people started driving again, and creating a crisis on the roads. Which brings us to our next point …

America’s drivers are taking more risks than ever

In 2021, traffic fatalities reached a 16-year high, with almost 43,000 people killed by cars. The Urban Institute found that Americans were three times more likely to die by a car crash than the French. 

While traffic fatalities have fallen since, they still remain higher than pre-COVID levels. In places like California, fatalities are still rising.

What’s contributing to this crisis? An increase in distracted driving , bigger cars on the road, and poor road design are some major factors. 

This rise in traffic accidents and fatalities, of course, gives insurers fuel for their rate filings, allowing them to raise insurance prices to higher levels. 

What can you do about it?

Despite high car insurance rates, there are still things you can do to bring your premiums down (besides the obvious one, which is maintain a safe driving record). For example: 

1. Enroll in a safe driving program or take an accident prevention course. Some insurers offer discounts to drivers to take their proprietary driving programs. 

2. Ask about a low-mileage program. If you work from home or don’t drive very much, you may qualify for a lower rate. 

3. Switch cars, if you have the option. Some cars have lower insurance rates than others. While this isn’t an option for everyone, you can significantly lower the cost of your rate by getting a car that’s easier to repair, for example. 

4. Bundle your policies. Bundling your car insurance policy with your home insurance or other insurance policies may help reduce your rate. 

As always, drive safely.

Need help budgeting for unexpected costs life throws your way? Start with a complimentary 15-minute call with a financial expert. 

Disclosures