Why Do Car Insurance Premiums Go Up Every Year

Beyond being a cautious driver

If you’re safe on the road shouldn’t your premium also be safe from big hikes? Not necessarily.There are many many other factors that can also lead to premium increases. Some are largely beyond your control.

Auto insurance is a business, after all. If costs go up for insurers, this can mean higher rates for customers, even those who do everything right on the road.

“Auto insurance is heavily regulated, so there is no margin for insurers to absorb increases in costs. So when costs rise, rates rise,” explains James Lynch, chief actuary and VP of research and education with the Insurance Information Institute.

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3. People are driving more

Accidents can drive up your premium rate – even if you’ve never been in one yourself. Economic growth, urban sprawl and low gas prices have people driving more than ever, according to the Federal Highway Administration.

And even overall good news can be bad news for your rates. “As the economy improves, people drive more miles,” Lynch says. “The previously unemployed are driving to work, and everyone drives more discretionary miles. This puts more cars on the road at any given time, which increases the chance of an accident.”

Lower gas prices may also encourage more frequent driving. The more driving, the more accidents, the more claims – and the more rates can go up across the board.

Why Rates and Quotes May Differ

To help ensure you receive an accurate quote, it’s important to provide complete and accurate information. Inaccurate or incomplete information can cause the quote amount to differ from the actual rate for the policy.

Some example situations that may lead to differences between the quote amount and the policy rate:

  • If you start a quote with only a vehicle make and model but no vehicle identification number (VIN), your rate may change after you enter the full VIN.
  • If you leave out information in the quoting process about accidents you’ve been in (even minor ones), your policy rate may be higher.
  • If you forget to provide details about your significant others’ driving history, such as speeding tickets, this may lead to a higher rate.

Making sure you have the right information can make the process of getting a quote easier. You will need to have:

  • A valid driver’s license
  • Vehicle identification numbers (VIN) for all vehicles
  • The address where the vehicle will be stored

You will also be asked about driving history for you and any other drivers on the policy. To get an accurate quote, it is important to be accurate and complete as possible with the information you provide.

If you decide to purchase a policy and elect to pay your premium in installments, it may result in an additional fee for each installment payment. This can also change the amount you expected to see on your bill.*

Is it possible to avoid increased insurance costs?

Bracing for a rate increase may seem stressful, but having the knowledge that your auto premium could go up can help you prepare and act quickly.

  1. Review your current policy: The first step in prepping for a premium change is understanding your current insurance policy. Reviewing your policy and knowing your coverage types, limits, discounts and premium can help you learn about your policy. If you aren’t sure how to analyze your policy, you might want to talk to an agent. Be on the lookout for your policy’s effective dates and see if your next renewal is available. If so, check the premium on that policy to see how your rate will be affected in 2022.
  2. Shop for a new carrier: Friedlander says that “comparison shopping is essential to obtain the best cost for the amount of coverage that fits your needs.” If you get your policy renewal and see that your premium has increased, you may want to first contact your car insurance company to see if you might be able to adjust your policy or add extra discounts to lower rates. For example, if you’re still driving less in 2022 than you were in previous years, could you earn an annual mileage discount? If you can’t offset your premium increase, you might want to shop around. While most car insurance companies sell the same types of coverage, each company also has its own underwriting rules, discounts, rating algorithm and policy features. Getting quotes from a few carriers might help you find a lower rate and a policy that fits your needs. You may even earn an early shopper discount if you switch in advance of your next renewal.
  3. Take advantage of discounts: Discounts can be one of the easiest ways to lower your premium. Reviewing your current discounts might help you identify areas where you could save. If you’re shopping for new coverage, you could look for a company that has several discounts that might be available to you.
  4. Check your other policies: Don’t forget about any other insurance policies you might have. Bundling your major policies, such as home and auto, with one carrier could potentially help you save money on both. Even if you can’t offset your auto insurance increase, you may be able to find savings on your homeowners insurance or renters insurance policy. Reviewing your entire insurance portfolio is a good way to make sure you are properly insured but not overpaying for coverage.

Turning 50

Your car insurance premiums usually go down as you age, reflecting the fact that as you mature, your driving habits get better. Once you turn 50, however, your car insurance premiums start to go back up.While some statistics show that the safest drivers include those in the 64 to 69-year-old range, car insurance companies still raise rates on older drivers.Luckily, drivers 55 and older can receive a discount on their car insurance for keeping a clean driving record or taking an approved defensive driving course, such as one offered by the AARP. The states that mandate these discounts include:
  • Alaska

  • Arkansas

  • California

  • Colorado

  • Connecticut

  • Delaware

  • Florida

  • Georgia

  • Idaho

  • Illinois

  • Kansas

  • Kentucky

  • Louisiana

  • Maine

  • Minnesota

  • Mississippi

  • Montana

  • Nevada

  • New Jersey

  • New Mexico

  • New York

  • North Dakota

  • Oklahoma

  • Oregon

  • Pennsylvania

  • Rhode Island

  • South Carolina

  • Tennessee

  • Utah

  • Virginia

  • Washington

  • West Virginia

  • Wyoming

  • Washington, DC

Once you hit the age of 70, though, premiums tend to go up, and this gets even worse at the age of 80. Insurance companies that reportedly offer better car insurance rates for older drivers include The Hartford, Esurance, and Mercury.

At-fault Accident

An at-fault accident is another primary cause of increased insurance premium costs. What this means is that you’re the one squarely responsible for causing the accident. If you file a claim after an at-fault accident, you’ll likely pay more. Luckily, some insurance service providers allow their customers to make small payouts without an increase. And again, purchasing accident forgiveness will come in handy here.

What determines car insurance rates?

Car insurance rates are based on a number of factors not directly related to your policy, including your location, age, gender, and marital status. Data about how often people in these different demographics have accidents will influence your rates. In terms of direct factors, your type of vehicle, coverage limits, deductibles, driving, and claims history all play roles. Your insurance carrier may also discount your rates if you purchase multiple types of coverage.

A Low Credit Score

It’s the global tradition for lenders to evaluate your credit score before determining your loan repayment ability. And as it turns out, the trend is now widespread in the auto insurance space. The insurance companies have concluded that clients with low credit scores are more likely to be involved in accidents. Therefore, they charge rates depending on the credit score as well.

Luckily, states like California bar insurance companies from using a customer’s credit scores to set the premium rates. Nevertheless, you have one more solid reason to improve your credit score.

Decreasing or “Disappearing” New Business Discounts

You may not have realized that some discounts you receive, usually when you first purchase your policy, are created as new policyholder incentives. Think of these as special offers for switching to a new company. You may get a particular discount for your first policy term as an initial offer, but then have it roll off after the first term is over. Sometimes, instead of the discount rolling off fully, some discounts may decrease gradually over more than one policy term. 

Why are auto insurance rates increasing?

Car insurance rates are calculated based on a number of underlying factors. Individually, your age (in all states except Hawaii and Massachusetts), gender (in most states), driving history, vehicle type and coverage choices impact your premium. Additionally, broader factors also impact rates, such as if states pass revised insurance laws, the likelihood of claims occurring in certain areas or if vehicle repair costs increase.

Inflation

Perhaps the biggest driver of higher 2022 car insurance premiums is inflation. Between December 2020 and December 2021, the Consumer Price Index (CPI) rose 7.0%. This means that, on average, we are spending 7.0% more than we were a year ago for the same goods and services.

Inflation pounded the new and used vehicle markets in 2021. The price for new cars and trucks rose by 11.8% between December 2020 and December 2021, while the used car and truck market saw a staggering 37.3% increase. Vehicles are also much more complex than they used to be, which adds to the overall cost of ownership. Even small accidents can cause hundreds or thousands of dollars worth of damage to delicate electronics that require specialized repairs.

Vehicle costs aren’t the only thing struck by inflation. The cost of healthcare is also on the rise. The Centers for Medicare & Medicaid Services reports that healthcare spending increased 9.7% in 2020, the most recent year with available data. This means that when someone is injured in a car accident, the resulting medical costs are greater than what they were in previous years.

Because car insurance is designed to pay for the costs after an accident — including both property damage and medical costs — anything that raises these costs is likely to raise rates. Insurers need to make sure they have enough funds to pay claims, so when inflation hits, car insurance rates are affected.

Supply chain disruptions

The last few years have created a perfect storm to disrupt supply chains. COVID-19 shutdowns caused decreasing demand in certain industries in 2020. With fewer people on the road and cars generally getting less use, there was a decrease in the need for vehicle parts. Then, an ice storm in February 2021 knocked out plants and factories across the South, the Suez Canal was blocked for six days in March 2021 and people began to return to a more normal level of driving, which caused increased demand but decreased supply. The auto industry has been one of the hardest-hit sectors. “Parts are more expensive, labor is more expensive and repair costs overall are more expensive,” Ellis says.

Perhaps the most evident of these vehicle-related supply chain disruptions was the difficulty in obtaining semiconductors. Semiconductors, often called “chips,” are used in a wide array of vehicle applications, including driver assistance systems, entertainment systems and electronic mechanisms. In December 2021, over 50 business leaders — including executives from American Honda Company, Ford Motor Company, General Motors and Toyota Motor North America — sent a letter to Congress urging the governing bodies to encourage the U.S. to create its own semiconductor research, design and production methods, to increase the supply of semiconductors and available jobs.

Labor shortages

Along with supply chain issues making parts harder to find, labor shortages have made skilled workers harder to find as well. The Bureau of Labor Statistics reports that unemployment is at 3.9% as of December 2021 — sharply down from the April 2020 peak of 14.7%, but not yet back to pre-pandemic levels of 3.5%. The “Great Resignation” has also pushed workers to reconsider their career paths, with many labor shortages caused not by unemployment but by workers switching jobs.

Fewer workers can contribute to rising insurance costs. When fewer people do any given job, including vehicle repair and healthcare jobs, pay rates often increase as an incentive. For example, perhaps a mechanic used to repair bumpers for $100. Now, that same mechanic is working longer days and taking less time off to make up for a reduced workforce. To compensate, the mechanic now charges $300 to cover the same repair. Because the repair costs more, insurance companies may increase rates to prepare for higher claims expenses.

Changing driving habits

As we hunkered down at the start of the COVID-19 pandemic in early 2020, the country saw an unprecedented reduction in driving levels. Many households stopped commuting to work, school and activities. Streets were quieter and accidents were fewer. As a result, many insurance companies refunded some premiums to policyholders.

However, Friedlander points out that

“In 2021, we saw a return to pre-pandemic driving patterns which led to a significant increase in auto insurance claims and accident severity. In fact, the National Highway Traffic Safety Administration reported an 18.4% increase in fatal crashes during the first six months of 2021 compared to the first six months of 2020 — the highest percentage increase on record.”

This pendulum swing of driving habits may mean insurance carriers need to rebuild their claim reserves — the money set aside and earmarked for paying losses — which could mean higher premiums.

What Other Factors Increase Your Car Insurance Premium?

Other factors, some beyond your control, may also lead to a rate increase. 

  • Change in marital status: Statistics show that single drivers file more claims than married ones. Your rate may go up if you divorce and, in some cases, after a spouse dies.
  • Adding drivers to your policy: If you add a new spouse or a teen driver to your auto insurance policy, the company may increase your premium. 
  • Change in gender marker: Female drivers tend to have fewer traffic accidents than males. If you change your gender marker from female to male, the insurer may increase your rate.
  • Your location: If claims for collisions, weather-related damages, auto theft, or vandalism increase in your ZIP code, your provider may raise your premium.
  • Your car’s make and model: If a spike in claims of your car’s make and model occurs, your carrier may increase your rate.
  • Your age: Most often, younger drivers pay higher insurance rates. While your rates may decrease as a young adult and when you reach middle age, they may increase when you reach your 60s.
  • Lost discounts: If you’ve earned a good-driver discount and have an accident, receive an employer discount and change jobs, or cancel a policy for which you receive a multipolicy discount, your car insurance rate may increase. 
  • Across-the-board rate increase: Insurance companies may increase the rates of all of their policyholders for various reasons. These include an increase in claims, the number of cars on the road, or more accidents involving injuries and fatalities.

Individual Risk Factor Weighting

Finally, your insurance company may re-evaluate how risky each of the characteristics, or factors, of your policy is, based on updated data. An insurance company may react to the results of such an analysis by increasing specific rating factors (and potentially decreasing others).  

As you can see, there are some obvious and some not so obvious reasons for the price of your car insurance to go up every year. Whatever the reason is, be assured that not all insurance companies will charge the same amount for the same coverage. That’s why it’s important to shop around occasionally for a better price if you feel your insurance has increased too much. Annual increases are very typical across the industry, but the way that your risk factors are viewed by any particular company may vary. 

To make sure you aren’t paying too much, you should know your coverage and discounts to ensure you are getting the best price for the coverage you need.  

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