I.I.I. Report: Auto Insurance Rates Expected To Rise This Year

December 5, 2000

Automobile insurance rates are expected to rise by 1.5 percent this year, the first increase in three years. Additional increases of 2 percent to 4 percent are likely in 2001. Among the factors driving rates upward are higher costs to treat people injured in accidents, a sharp acceleration in the cost of vehicle repairs, and bigger jury awards in vehicular liability cases, according to the Insurance Information Institute. This year’s expected increase will end the recent trend toward falling prices for auto insurance. Rates fell by 3.2 percent in 1999 and 2.8 percent in 1998, the first decreases since 1973.

While many motorists with good driving records continued to see savings in 2000, many drivers-especially those with poor driving records-saw increases. “Costs associated with settling automobile claims are on the rise,” said Dr. Robert P. Hartwig, vice president and chief economist with III. Hartwig says medical costs are rising at their fastest pace in six years and that the average jury award in vehicular liability cases is up 81 percent since 1994. Moreover, a 1999 Illinois court decision that led many insurers to suspend their use of aftermarket (generic) crash parts in automobile repairs gave manufacturers of name-brand parts a virtual monopoly on this multi-billion dollar market.

“Monopolies are invariably bad for consumers,” said Hartwig. “According to federal statistics, the cost of motor vehicle body work is rising nearly three times faster than it was in 1999 and is accelerating. This means the price of insurance to pay for those repairs will have to rise, too. The effective prohibition on the use of generic parts of like kind and quality in the repair of damaged vehicles is a factor that could ultimately add $4 to $5 billion annually to the cost of automobile insurance,” he added.

Higher medical costs have re-emerged as a major concern for insurers. Hartwig said that the same factors that are pushing up employer health care costs across the country are pushing up the costs of treating people injured in car accidents. “The pace of medical inflation is up more than 50 percent since 1997,” said Hartwig.

Hartwig also noted that 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 $175,000 in 1994 to $316,000 in 1999-an increase of 81 percent -compared to an increase of just 15 percent in the Consumer Price Index over the same period,” said Hartwig, adding that liability issues are much more important than people realize. “About 60 percent of auto premiums paid in 1999-nearly $70 billion-were for liability coverages,” he said.

The average auto insurance expenditure per vehicle will rise by an estimated $10 this year to $707 compared to a decline of $7 in 1999. In 2001, the average expenditure on auto insurance is expected to rise by $22 per vehicle to $729. Auto insurance expenditure measures what the average consumer actually spends for insurance on each vehicle and takes into account many factors besides rate changes, including driving record, price trends for new and used vehicles, eligibility for discounts, consumer automobile purchasing trends (e.g., cars vs. SUVs), and consumer choice of elective coverages (e.g., collision, comprehensive).

According to Hartwig, the typical two-car family in the suburbs will probably notice the increase because it is the first in several years for most drivers. Moreover, many families are already paying more for auto insurance than they were a few years ago because they likely purchased at least one new car during that period. “Expensive SUVs and trucks are accounting for an ever higher share of vehicle sales-nearly 50 percent today vs. 32 percent in 1987.”

Hartwig noted that despite rising costs, competition between insurers will likely help keep a lid on the cost of automobile insurance, leading to an expected increase of just 1.5 percent in this year’s average expenditure for auto insurance. “Drivers with poor driving records will see the largest increases-double digits in some cases,” said Hartwig. Because higher medical, repair and liability costs affect the cost of insuring all drivers, even those with relatively good records can expect to see a modest increase in the cost of insuring their vehicles in the year ahead.

The Insurance Information Institute is a fact-finding, communications organization sponsored by the property/casualty insurance industry. This report is available at http://www.iii.org.

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