Auto Insurance Rates Surge 22.6%, Largest Jump Since 1979, Relief Expected

Auto insurance rates up 22.6% year-over-year, but relief may come as vehicle prices and repair costs stabilize.

By Athena Xu

5/23, 12:42 EDT
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Key Takeaway

  • Auto insurance costs surged 22.6% year-over-year in April, the largest increase since 1979, driven by higher vehicle prices and repair costs.
  • Bank of America forecasts a slowdown in the rate of auto insurance premium increases as insurers return to profitability.
  • Lower auto insurance inflation could give the Fed confidence to start cutting rates later this year, with market expectations for a first cut in September.

Auto Insurance Costs and Inflation

Soaring auto insurance costs have been a significant driver of inflation over the past year, but relief may be on the horizon, according to Bank of America. The bank’s economists attribute the surge in premiums to underwriting losses in the industry, driven by higher vehicle prices, increased repair costs, and a rise in accidents as driving trends returned to pre-pandemic levels. "The turbocharged increases in motor vehicle insurance premiums are a response to underwriting losses in the industry. Insurers saw losses," said BofA economist Stephen Juneau. However, Juneau noted, "There are signs that many insurers are getting back to profitability."

Recent data from the Bureau of Labor Statistics shows that sales prices for new and used vehicles have been trending lower, down 0.4% and 6.9% respectively on a 12-month basis through April. Additionally, repair and maintenance services costs were flat in April, though still up 7.6% from a year ago. Despite these positive trends, motor vehicle insurance costs continued to rise, increasing 1.8% in April and 22.6% year-over-year, the largest annual increase since 1979. Auto insurance has a nearly 3% weighting in the Consumer Price Index (CPI), making it a significant component of overall inflation.

Potential Relief for Consumers

While the recent trends in vehicle prices and repair costs are encouraging, they may not immediately translate to lower premiums for consumers. "The recent trends probably do not mean that your premium will fall, but we think the rate of increase should slow," Juneau said. This aligns with the broader inflation narrative, where prices are not necessarily falling, but the rate of increase has slowed compared to mid-2022 when inflation peaked at its highest level in over 40 years. Overall CPI inflation ran at a 3.4% annual rate in April.

The Federal Reserve's primary inflation barometer, the Commerce Department’s measure of personal consumption expenditures (PCE), gives auto insurance a smaller weighting than the CPI, making it less of an inflation driver. If Bank of America's forecast for insurance disinflation is accurate, it could provide the Fed with more confidence to start cutting rates later this year. Current market pricing indicates an expected first rate cut in September, with another possible before the end of the year. "We think further improvement in this aggregate is one key for the Fed to become more confident in the disinflationary process and start its cutting cycle," Juneau said. "Until then, we expect the Fed to keep rates in park."

Mortgage Rates Decline

In a related development, U.S. mortgage rates have dipped below 7% for the first time in over a month, with the average rate for a 30-year fixed loan falling to 6.94% from 7.02% last week, according to Freddie Mac. This marks the third consecutive week of declines, providing a modest boost for homebuyers navigating a challenging housing market characterized by high prices and limited inventory. The recent easing of rates is a welcome development, especially during a time of year when the market typically heats up due to warmer weather drawing more people to open houses.

Despite the decline in mortgage rates, the housing market remains under pressure. Transactions for previously owned homes fell in April for the second straight month, and new home sales also saw a decline. The high mortgage rates, which had hovered close to 7%, coupled with rising home prices, have made it difficult for many buyers to afford properties. However, the recent downward trend in rates and an increase in the inventory of homes for sale may offer some relief. "Greater supply coupled with the recent downward trend in rates is an encouraging sign for the housing market," said Sam Khater, Freddie Mac’s chief economist.

Street Views

  • Stephen Juneau, Bank of America (Cautiously Optimistic on the auto insurance industry):

    "The turbocharged increases in motor vehicle insurance premiums are a response to underwriting losses in the industry. Insurers saw losses... There are signs that many insurers are getting back to profitability."
    "There’s some good news on that front... Sales prices for new and used vehicles have been trending lower in recent months and are down 0.4% and 6.9%, respectively, on a 12-month basis."