Cost Drivers: How Riskier Roads, Rising Repairs, and Reckless Driving Are Increasing Insurance Costs

As our country and the world continue emerging from the fog of COVID-19, the cost of auto insurance will be squarely in the headlights for many policymakers at the federal, state, and local levels for some time to come. This interest would have developed with or without a global pandemic, but as with many products, COVID-19 has highlighted, accelerated, and exacerbated many existing and emerging challenges in auto insurance. Despite insurers voluntarily providing more than $14 billion in relief to consumers, waiving fees, suspending exclusions, and pausing cancellations during the pandemic, consumer advocates, elected officials, and some regulators continue to focus on auto insurers for alleged “windfall” profits while failing to recognize the last decade of losses in a low-interest rate environment. In fact, a robust review of historical and ongoing trends in the market should give policymakers significant pause before embracing any hasty, unnecessary actions that will disrupt markets and disproportionately hurt exactly those constituents they are seeking to help.

The stark reality is that the rising cost of auto insurance is a downstream symptom rather than the root cause of a problem, and efforts to further legislate or regulate auto insurer practices in hopes of lowering costs will not be successful because they are not focused on these root causes. Like many other industries, modern auto insurance carriers find themselves in the unenviable position of having most of their costs determined by external forces they can do very little to control.

This paper provides an overview of the cost of modern auto insurance, identifies the most prominent pressures driving current costs, and suggests several policy recommendations for consideration by legislators as they establish rules for the future of financial protection on the roads for all Americans.