How has 2020 affected auto insurance rates?

One of the most notable early impacts of the novel coronavirus pandemic was that people started staying home a lot more, resulting in relatively empty highways and declines in driving activity totaling tens of millions of miles. That was a boon in some ways for insurers, who extended discounts to their existing customer bases (thanks partially to pressure from political leaders). However, the general consensus is that auto insurance costs will likely go up in 2021, for reasons many drivers may not think much about.

For instance, while there were fewer accidents on American roadways this year because so many people spent a long period of time driving far less than they normally would, the accidents that did take place were more severe. Furthermore, insurers are likely to roll back the discounts they put in place during the early days of the pandemic, if they haven't done so already, and many companies are still trying to dig out from notable losses incurred in previous years; from 2014 to 2018, the 10 largest auto insurers in the U.S. saw profits decline by an average of 3.3%, despite raising rates an average of 4.4% over that time, Value Penguin reported.

Moreover, auto insurers face losses in other ways besides just paying out claims on auto accidents, even as repairs become more costly by the year. When severe weather strikes, as it has in each of the last three years, P&C underwriters including companies issuing auto insurance can take a major hit. For instance, when wildfires gripped California in 2018, the Golden State's Department of Insurance estimated that losses from auto and non-residential claims topped $123 million in a single month. Likewise, when Hurricanes Michael and Florence made landfall around the same time, auto insurance losses represented a non-trivial part of estimated $14-plus billion in damage.

Given that 2020 was a more active year for both wildfire activity and the Atlantic hurricane season (the latter setting an all-time record for named storms), it should come as little surprise that insurers would want to make up those losses.

Accident damage is becoming more costly for insurers to deal with.

Variations by state
Of course, most drivers understand that where they live can have a significant impact on their rates, based on a number of factors including risk and the state-level laws that govern the industry. For instance, according to Bankrate, Michigan saw the highest minimum premium cost in the country this year, at just under $1,000, thanks largely to the state's no-fault insurance rules. By contrast, the least expensive state in the country for minimum-coverage auto insurance is Maine, at just $227.

In terms of full-coverage premiums, however, Michigan is actually outpaced by two states: Louisiana and Florida. This, too, should come as little surprise; these are usually the two states most likely to be hit with tropical storms and hurricanes, which is why average full-coverage auto insurance in 2020 cost more than $2,700 and almost $2,550 in those states, respectively. Michigan checked in at third ($2,375 on average).

Here, too, Maine carried the lowest annual cost for full coverage ($782), and nearby Vermont is the only other state with average costs of under $1,000. By contrast, nine states had average full-coverage premiums of more than $2,000.

Rising repair costs a concern
As mentioned above, another big driver of auto insurance losses in recent years is that the amount of technology and high-cost materials that go into modern motor vehicles is significantly driving repair costs. The Insurance Research Council recently found that from 2010 to 2018, the cost of physical damage to vehicles rose at more than twice the rate of inflation (3.7% per year, on average, versus 1.8%).

There are a number of factors driving this new paradigm for auto insurers, including the fact that vehicles being written off as total losses has become more common and carries a larger price tag, and catastrophe claims amount to roughly 20% of all insured losses. At the same time, costs for injuries have become smaller and legal fees are less likely because attorneys tend to be less involved in accidents that do not result in injury.

David Corum, vice president of the IRC, added that this is a trend likely to become more prominent insofar as vehicles are growing simultaneously safer and more technologically advanced.

Aligning with consumer expectation
In general, people are happier with their auto insurers now than they have ever been, according to the latest data from J.D. Power and Associates. In fact, 2020 saw underwriters garner a record satisfaction rate of 835 out of 1,000. However, consumers are still somewhat likely to have their opinions of their insurers reshaped when they have to file claims. The survey found that drivers are least likely to renew policies with an existing insurer if their claims are denied, but when claims are fully settled, there is no bigger driver of customer loyalty.

With all this in mind, it is perhaps advisable for insurers to be more proactive about outreach when it comes to rate and policy changes, educating consumers about what impacts their coverage and costs on an ongoing basis.