Why car insurance costs are rising at the fastest rate in 47 years

As car prices moderate from a pandemic-era surge, insurance has pushed the cost of car ownership to the brink for many Americans.

New data out on Wednesday from the Bureau of Labor Statistics showed auto insurance costs last month were 22.2% higher than they were a year ago and increased from February's 20.6% year-over-year gain. This rise in prices is tied with January's increase as the largest gain since December 1976, when costs rose 22.4% over the prior year.

The sticker shock hitting many American drivers is being driven by a rise in accidents, the severity of accidents, and geographical factors combining to create a perfect storm and push costs higher.

'Severity' and bodily injury claims on the rise

The most alarming factor driving insurance costs higher is more severe claims.

"In general, the numbers of crashes, injuries, and fatalities are up, and inflation has made the cost of repairs more expensive," AAA spokesperson Robert Sinclair told Yahoo Finance.

Sinclair said motorists developed "bad habits" on the road during pandemic lockdowns, contributing to current behavior. For example, as the New York Times reported earlier this year, researchers in Nevada discovered that during the pandemic, motorists were speeding more (and driving through intersections), seat belt use was down, and intoxicated driving arrests were up to near-historic highs.

Sinclair also pointed to NHTSA data, which found that in 2021, at the height of the pandemic, road fatalities increased by 10.5% to their highest level since 2005, even while most Americans stayed at home. The NHTSA said it was the highest percentage increase it had ever seen. The agency found that fatalities in 2022 only decreased by 0.3% as compared to 2021.

Insurance tech firm Insurify found that auto insurance premium hikes were "largely due to the skyrocketing price of auto parts and the increasing number and severity of claims." And while increases may moderate, analysts still believe further premium hikes are on the horizon.

"While the magnitude of rate increases is likely to ease somewhat, after several years of double-digit increases, some lingering claim cost inflation and adverse claim severity and frequency will likely lead to a 'higher for longer' auto rate environment,” CFRA analyst Cathy Seifert told Yahoo Finance.

Not surprisingly, severe accidents leave insurance companies with rising loss ratios, or a share of premiums collected that insurers paid out in claims.

"Broadly speaking, severity in [the] auto [business] is running mid- to high-single digits — think closer to mid in the vehicle severity, think closer to high in bodily injury — and so that's sort of where trends are running today," Travelers (TRV) personal insurance president Michael Klein said during the insurance giant's latest earnings call in January.

"We've seen a bit of a mix shift towards more bodily injury claims, which is one of the things that has us keeping our severity trend estimates at that sort of elevated level," Klein added.

In response, Travelers increased premiums, especially for customers renewing their policies. In the fourth quarter, its renewal premium price change was a whopping 16.7% in its auto business, contributing more than $2 billion of additional premium into the segment compared to the same quarter last year.

GEICO, the insurer owned by Warren Buffett's Berkshire Hathaway (BRK-A, BRK-B), also felt the effects of those rising severity claims.

The second-largest auto insurer in America behind only State Farm, GEICO was hit by six consecutive quarters of underwriting losses beginning at the height of the pandemic. The company has since responded with more aggressive policy writing, trimmed marketing budgets, and higher premiums.

GEICO eventually earned $3.64 billion before taxes from underwriting in 2023, but the trend of higher severity of claims remains.

"Average claims severities continued to rise in 2023 due to higher auto repair parts prices, labor costs, and medical inflation," the insurer said in parent Berkshire Hathaway's 2023 annual report, despite the frequency of claims coming down for property and auto claims.

GEICO said, "Average claims severities in 2023 were higher for all coverages, including property damage (14-16% range), collision (4-6% range), and bodily injury (5-7% range)." GEICO also sought rate increases in numerous states in 2022 and 2023 in response to accelerating claims costs.