Why Insurance Prices Have Skyrocketed

Insurance premiums for autos, homes, and health have increased significantly in the United States, contributing to inflation and the high cost of living for consumers nationwide.

Consumer price data released by the U.S. Bureau of Labor Statistics (BLS) shows that car insurance premiums rose at a whopping annual rate of 22.2% in March, well above the 3.5% rise in the Consumer Price Index (CPI). In addition, home insurance premiums are up 23% over the previous year.

Michael Collins, CFA, and Founder and CEO of WinCap Financial, attributed the problem to several factors.

Top on the list is the increasing cost of claims due to more frequent and severe natural disasters, accidents, and other unexpected events. This means insurers pay more in claims, which results in higher customer premiums.

Next on the list is the growing demand for coverage as the global population and economy continue to grow, driving up premiums to balance the market.

Third, technological advances have made vehicles more sophisticated and expensive, and cyber threats and other high-value items have raised the cost of insuring them.

Fourth, healthcare costs are rising due to more expensive medical treatments. Health insurers must charge higher premiums to cover these costs.

Fifth, regulatory changes and new risks, such as climate change and cybercrime, add to coverage costs.

"Overall, the combination of these factors has led to a significant increase in insurance prices," Collins said, adding, "While insurance companies are always looking for ways to mitigate these costs, it is ultimately the customers who pay the price for these factors beyond the control of insurance providers."

Still, insurers' ability to pass the rising cost of coverage on to consumers helps them maintain profitability and be big winners on Wall Street. Over the last 12 months, for instance, Progressive Insurance's stock has been up 53%, and Allstate Insurance's stock has been up 42%, compared to the S&P 500's 21% gain.

Hugh Allen, Principal Product Strategist @ Hi Marley, added a couple more factors that drive auto insurance higher, like more drivers driving more and higher auto accident frequency and severity. These factors lead to more claims and deteriorating auto loss ratio results.

"In addition, when coupled with increased frequency and severity, the impact of inflation is felt by auto insurers via increased vehicle repair parts and labor costs, rental car costs for first and third-party claimants, and injury-related costs, such as medical bills. These costs ultimately get passed to consumers through increased auto insurance premiums," Allen said.

Guillermo Cornejo, who worked in the auto industry for Nissan, GM, and Hyundai before starting Riders Share, provided further insight into how the rise in driving miles in the aftermath of the COVID-19 pandemic affects insurance premiums.

"The average car insurance policy is now 40% more expensive than it was in 2021, per Insurify," he said. "Insurance in 2021 was 8% cheaper than in 2019. This was likely due to lower miles driven per customer. Lower miles driven mean fewer accidents. As the economy returned to normal, people drove more miles per vehicle. VMT, per the St. Louis Fed, is about 18% higher than during the pandemic. It is, in fact, a record high, like pre-pandemic levels."

Jack Hooper, Founder and Chief Executive Officer at Take Command Health, listed a few factors that drive healthcare premiums higher, like soaring labor costs due to nursing shortages, higher drug costs, and limited cost containment - PPO plan designs that agree to pay a percentage of costs that are just passed through to employers and employees.

"People say healthcare is broken. It's not. It's functioning exactly how it was designed," Hooper said, adding, "It's just a bad design with poorly aligned incentives: providers make more the more they do, insurance companies pass through costs, and individuals are left confused."

(Disclosure: The author owns shares of Progressive and Allstate)