perfect storm
Inflation ebbs and flows in unpredictable ways. The insurance world is sure to find out – and so will customers see their auto insurance bills.
“Auto insurance hasn’t kept pace with inflation for the past three to four years, and it’s finally catching up,” said Michael Long, CEO of Axia Insurance Services in Springfield, explaining in part why the average insurance premium nationwide has risen by more than $240. In the past year, according to Bankrate.
There are plenty of other parts to the equation, of course, including the persistent supply shortages that generate inflation in everything that goes into cars, from materials to computer chips to labor.
In fact, used car values in 2022 are 37% higher than they were previously, Long said, which means insurance companies that used to pay, say, $20,000 for a bulk car are now paying $30,000. In the end, that was going to be passed on to customers.
Bill Grinnell, Managing Partner of Webber & Grinnell Insurance, agreed. “There are a few things that drive car prices; the first is supply chain issues, lack of supply of vehicles and replacement parts, and the increasing costs of all of that.”
As a result, he continued, “Your collision claim that might have cost a few thousand dollars before the pandemic is now $3,800. It’s a lot more than that, and insurance has kind of lagged behind that inflation. First, the cost of replacing vehicles and parts goes up, and that’s reflected.” In the insurance company’s financial statement, and they have to react and raise rates. It’s not a leading feature, but it’s a lagging feature, but there’s an inflation factor there.”
And it’s not just car insurance. On the home insurance front, the cost of building materials has risen sharply over the past few years, and supply shortages and lag times continue to beset the construction industry. Meanwhile, contractors dealing with these problems and also a manpower crisis cannot take on as many jobs as they would like.
Bill Grinnell
“It might have cost $175 per square foot to build a house three years ago, now it’s $275 per square foot. If you insure a house for $300,000, now it’s $400,000.”
The combination of these two factors has led to an increase in the cost of repairs, and this is reflected in an increase in claims payments. So insurance companies need to adjust their rates to afford these claims payments.”
The other big factor is the huge rise in home values over the past two years, which is another measure of supply and demand. “You are required to insure your home with an educated and calculated measure of its true replacement value,” Grinnell said. “And maybe three years ago it cost $175 per square foot to build a house, now it’s $275 per square foot. If you insure a house for $300,000, now it’s $400,000.”
Whatever the reason—and there’s clearly a lot—insurance customers are experiencing more pain than usual with their monthly premiums. While there are ways to lessen the blow, the main economic factors influencing these increases will persist, at least in the short term.
Up above and far away
Plymouth Rock Assurance recently created an infographic showing clients why homes and cars are so expensive.
On the domestic side, a shortage of workers was registered (the construction sector decreased by 200,000 commercial workers); supply chain shortages and delays on everything from asphalt shingles and pipes to copper wire and drywall; Wood and other materials costs over 50%; Increased operating expenses for energy, transportation, storage, etc.
On the automotive side, higher costs are associated with a lack of chips. lack of technical manpower in driving costs about 6%; shortage of spare parts in repair shops causing delays, high demand, and high repair prices; And auto inventory remains low on many lots, inflating the price of sticky cars — and their replacement value.
Michael Long
“Not all insurance companies are created equal. Whether it’s the way they handle claims, the way they handle billing, the way they handle cancellations after one or two losses, all of those things should be discussed with an agent because not all The contracts are the same.
“It’s a tough time for all of us,” Long said. “When we talk to customers, last year rates were up about 15% on the auto side, and we expect another 8.4% this year.”
Some cost factors are unexpected – eg, glass replacement. “With glass claims, it used to be a few hundred for a windshield replacement. I’ve seen it run up to $2,400 because of all the information you get from the sensors in the windshield.”
Then there is driver behaviour. Long noted that accidents are up 7% in 2022, and insurance companies haven’t seen the scale of lawsuits they’re dealing with.
Grinnell agreed. The results were even worse for insurance companies. The severity of accidents is going up, and that also raises the cost of insurance.”
There are only so many ways for customers to reduce insurance costs, and some of them make sense.
“First, you don’t have a claim,” he said. “Claims really do affect your premium quickly, so drive safe and there are no motor vehicle violations; Don’t get a speeding ticket.”
He said paying bills on time also helps. “There are many hidden factors that none of us understand, even at the agency level, that go into the appraisal process these days, but late payments, being constantly late, and getting cancellation notices is a surefire way to increase your premiums. So pay your bill on time and even Sign up for automatic bill payment.
While it’s important to have adequate coverage, Grinnell said people with older cars who may not drive them for longer may opt out of collision coverage. He did exactly that with a car a 12-year-old owned but didn’t drive much, and it saved him about $450 a year.
Long said he talks to customers all the time about increasing their discounts. “If you currently have a deductible of $500, you would probably look at a deductible of $1,000. If it was $1,000, maybe $2,500. We regularly quote $2,500 deductions.” Meanwhile, “If a tree falls and you lose $500, grab it and pay it in full.”
Carriers also offer any number of discounts, from safe driver and good student benefits to discounts related to participation in organizations ranging from the Pan Mass Challenge to the Massachusetts Golf Assoc. “There’s a Red Cross discount; if you contribute $25 to the Red Cross, you get a 5% discount on your insurance. So you’re helping the community and saving money on insurance. Everyone wins with this deal.”
weather conditions or not
The home insurance market has been hit by a series of costly weather events, from hurricanes in Louisiana and Texas to hurricanes in the Midwest to wildfires in California. Insured losses from natural disasters routinely exceed $100 billion a year these days, and Long said $20 billion of that in 2022 was in auto claims alone.
As mentioned earlier, the cost of wood and other building materials (33.9% increase in 2022) and labor (27% increase) are already causing insurance companies to play catch-up, and weather and climate events are just another challenge to deal with.
“It’s been a funny year for the homeowners,” Grinell said. “Real estate prices around the country have definitely been impacted by some of these changes in climate and weather patterns, and significant storm losses.”
He pointed to a “major freeze” day last year that ended up affecting home insurers in the area. “It was one of the biggest wasted days on record. Pipes are exploding, and those are very expensive claims. All in all, it doesn’t help our district at all.”
Long advises people to be careful when switching carriers due to higher rates because the new carrier may not have made the same inflationary adjustments, and the customer will just have to contend with that again—with the potential for loss of benefits like accident relief.
“Not all insurance companies are created equal. Whether it’s the way they handle claims, the way they handle billing, the way they handle cancellations after one or two losses, all of those things should be discussed with an agent because not all The contracts are the same.”
On the other hand, Long said clients should absolutely stay in touch with their agent. How often do you review insurance with them? Every year isn’t realistic, but every two to three years, you should get a call from your agent: “Hey, let’s talk about what’s going on, and any new coverage there.”
After all, people still need adequate coverage in case the worst should happen. And with what it is now, the total loss could be more catastrophic if the coverage does not keep up.
The biggest investment people have is their home. So, young people may have time to make up for the disaster, and build equity into their home if they lose it,” Long said. For older homeowners, inadequate loss coverage can be a real problem.
The bottom line? Long said insurance costs money, and even more so this year, as customers can expect premiums to rise another 8% to 10% for both home and auto.
But when disaster strikes—even a small one, like a pipe explosion or a car swept to the side—it beats not to cover.