Why Are Car Insurance Rates Increasing?
Between 2020 and 2024, motor vehicle insurance rates have climbed approximately 54%.
Published August 2, 2024 by the USAFacts team
Motor vehicle insurance is a required expense for all drivers across the United States, with only a few exceptions. This coverage, encompassing damage, liability, and other risks, has become increasingly costly since 2020. A significant driver of these increases is inflation, which drives up repair and parts expenses. From June 2023 to June 2024 alone, the price of personal motor vehicle insurance saw a 19.5% increase.
Additionally, insurers may be raising rates because of the spike in repair costs, coupled with reduced returns from their bond investments.
How Much Have Insurance Rates Gone Up?
Insurance costs are escalating more rapidly than overall inflation. Data from the May 2024 Consumer Price Index indicates that the motor vehicle insurance index—which tracks the change in insurance costs over time—was approximately 2.7 times higher than the national inflation rate.
What is the Motor Vehicle Insurance Index?
This index is a measure of changes in the costs associated with motor vehicle insurance over time. It considers the costs of physical damage, liability, and other miscellaneous coverage for private passenger vehicles.
What is the US Inflation Rate Index?
The US inflation rate index measures the average change in prices paid by urban consumers for a market basket of goods and services. This includes the relative costs of housing, food, gas, and other regularly purchased items. The Federal Reserve aims to keep inflation around 2% to balance employment rates and price stability.
From 2020 to 2024, insurance rates have increased by about 54%.
Why Are Car Insurance Rates Rising? Key Factors
Several factors influence the cost of car insurance:
- Age and gender: Younger drivers, particularly men under 25, typically face higher rates because they are statistically at a higher risk of being involved in accidents. Rates generally stabilize as drivers age, but they often increase again for senior drivers as the risks associated with aging arise.
- Marital status: Married individuals are statistically less likely to be involved in accidents. As a result, they often receive lower rates compared to single individuals.
- Vehicle type: High-performance and luxury vehicles generally come with higher premiums, since these cars are more expensive to repair and are also more frequently targeted by thieves.
- Location: Urban areas with higher traffic volumes and crime rates tend to have higher insurance rates. In contrast, rural or less densely populated areas might see lower rates.
- Driving patterns: The more miles a driver covers, the greater their risk exposure—and the higher their insurance premium.
- Driving record: A riskier driving profile — a history of accidents, traffic violations, or insurance claims —can significantly increase premiums.
- Credit history: People with lower credit scores are often offered higher premiums due to perceived financial instability.
Broader economic and regulatory environments also contribute to car insurance rates.
According to the Congressional Research Service, rising inflation has increased repair and part costs, directly impacting premiums. The surge in inflation during 2021 (7%) and 2022 (6.5%) led to higher prices for building materials and auto repairs, which directly influenced insurance rates.
Fluctuations in interest rates also affect insurers’ investment returns, which are vital for their profitability and pricing strategies. When the Federal Reserve increased interest rates in 2022, this caused a noticeable decrease in the value of insurers’ bond investments. That impacted their overall financial stability.
With lower income from bond investments and increasingly expensive repair costs, insurance companies might raise the price of existing policies to counteract the losses.
State-specific regulations can also impact rates. Complex regulatory frameworks can delay or moderate rate increases. States with more flexible environments allow insurers to adjust rates quickly in response to market changes.
These factors collectively shape the complex dynamics of insurance pricing, balancing consumer protection with market stability.
