What’s Driving the Rise in Car Insurance Rates?

Car insurance rates have been skyrocketing. We explain what’s behind the jump in premiums and what you can do about it.

Why Car Insurance Rates Are Climbing

You may be among the millions of Americans who’ve seen their car insurance premiums increase recently. On average, car insurance rates have gone up 19 percent year-over-year as of August 2023, far exceeding recent high inflation rates. By some estimates, car insurance premiums approach 3 percent of the median household income in the US. And these increases aren’t uniform across the country as some states, like Florida reaching 150 percent of the national average for premium costs, to the tune of roughly $3,100 per year versus the national average of approximately $2,000 per year.

So why have car insurance premiums been spiking? And what can consumers do to lower their costs? We have answers.

Normal Cost Contributors

Before we dig into the reasons behind the recent rise in car insurance premiums, we’ll need to consider what does into determining that premium in the first place. Insurance companies set their rates based on customer specific criteria. These include your driving record, your credit score, and the type of vehicle being insured (if you’ve ever gotten a quote for a sports car or even just a V8-equipped vehicle, you’ll know what I mean).

Additional considerations look at your location and account for the local cost of living, traffic density and traffic patterns, local accident rates, and local weather patterns. As we’ll see below, some of these socio-geographic factors have been changing recently, directly contributing to the increase in premium costs.

Inflation

This one’s the most obvious culprit. Car insurance premiums are up because the cost of most everything is up. The annual inflation rates are telling. After 2020’s abnormally low 1.2 percent inflation rate the number jumps to 4.7 percent year-over-year for 2021 and bounds to 8 percent for 2022. Yes, things have settled down since then, tapering back down to 3.7 percent in August of 2023.

And while the overall inflation rate has been tough on many markets, it has been especially so for car insurance. As we noted above, car insurance premiums have far exceeded the overall inflation rate at 19 percent year-over-year as of August of 2023.

Repair Costs

One major reason for the increase in premiums directly relates to the cost of repairing vehicles. Vehicle repair costs rose from July 2022 through July 2023 by 12.7 percent. As cars have become more technologically advanced, the cost of repairing them has gone up as well. Supply chain constrains continue to dog the automotive industry, creating longer waits for repairs and further increasing the cost of parts.

Accident Rates

Another reason for rising car insurance premiums is the uptick in accidents we’ve seen over the past few years. The national rate of fatal traffic accidents rose an alarming 18 percent year-on-year between 2020 and 2021. While the number of crashes has thankfully begun to trend back downward, the insurance industry has had to pay out more claims than in the past.

Those accident rates also reflect relative risk for insurers. The more accident-prone drivers are on average, the greater risk insurers will have to pay out on a claim. Insurance companies have been raising their rates as a hedge against potential future losses.

Climate Change

Extreme weather events related to climate change have having a major impact on the insurance industry, including car insurance. According to the National Centers for Environmental Information, the frequency of billion-plus dollar weather-related disaster has been steadily increasing in recent decades. The US averaged 3.3 billion-dollar disasters per year through the 1980s, by the 2010s the average had risen to 13 per year, and in the 2020s that average is up to 20 per year.

Insurance companies are facing such high claim rates and claim costs that they are fleeing the home insurance market in states like Florida for hurricane risk and California for wildfire risk. Car insurers, like home insurers, see claim costs rise with the increasing frequency of extreme weather events. In turn, they are passing that cost on to consumers in the form of higher premiums.

Reinsurance Rates

Reinsurance, that is, the insurance that insurance companies take out against major payouts, like those that occur from natural disasters, has also been going up in price. Indeed, companies like Farmers cite their own insurance costs as a major reason for leaving markets like Florida.

What Consumers Can Do About High Insurance Rates

Car insurance costs, like all inflation related pricing, don’t be going back down. But there are ways you can mitigate the bite of insurance premiums on your personal bottom line.

First, drive a less expensive, slower vehicle. As we noted above, the type of vehicle you own has a significant impact on your rate. The more expensive a vehicle is to replace, the higher the premium. The faster a vehicle is, the higher the premium.

Next, improve your credit score. Insurers used your credit score as a proxy for your overall trustworthiness.

Avoid accidents. We all know an accident will raise your rates, but insurance companies will often lower your premium if you can show a record of safe driving. Some companies go so far as to offer a lower rate based on your actual driving habits as monitored by GPS, though there are data privacy considerations to be had there.

Shop around. If you’ve been hit with big increases in your car insurance premiums, it may be time to shop around for car insurance. (We still recommend everyone get full-coverage whenever possible.)

Don’t be a teenager. Seriously. Car insurance companies take the age of motorists into account as well, and being a teenager is about as bad as you can get on an actuarial table.

For more information on car insurance, here’s our comprehensive insurance explainer (pun unavoidable).