The cost of auto insurance is becoming an increasingly significant expense for drivers, according to Bankrate.
This year, drivers are spending an average of 2.93% of their income on car insurance, with an average premium of $2,014 and an average national income of $68,852.
This represents an increase from 2022 when the average rate was 2.57% with a premium of $1,771. This reflects a nearly 14% rise in car insurance rates from 2022 to 2023, compared to a 6.5% increase in overall inflation in December.
Unfortunately, this trend is expected to continue, as auto insurance providers grapple with the rising costs of repairs, labor, and claims. According to Martin Ellingsworth, an executive managing director in the P&C Insurance division of JD Power, most insurance companies are currently losing money on auto policies.
What states are spending the largest portion of their incomes on auto insurance?
New York and Florida are the states where residents spend the highest percentage of their income on car insurance, according to Bankrate. New Yorkers spend 5.05% of their income on average annual premiums of $3,139, which is significantly higher than the national average of $2,014.
This increase of 1.18 percentage points from the previous year is attributed to the crowded roads in the state, as more vehicles on the road increase the risk of accidents and the insurance providers’ risk, leading to higher rates.
Florida residents come in a close second, with 4.9% of their income going towards an average annual premium of $3,183, an increase of $421 from the previous year.
Why are Americans spending more on auto insurance?
The rising cost of repair parts, labor, and medical care, combined with increases in the frequency and severity of accidents, as well as record levels of personal injury judgments and vehicle thefts, are contributing to the growing expenses faced by auto insurance providers, according to Cate Deventer, an insurance editor at Bankrate.
These costs are being passed on to consumers, and more increases are expected in the future. Car insurance prices typically lag behind cost increases as insurance companies must first submit new rate requests to each state’s department of insurance and wait for approval before implementing price increases.
How much more can Americans expect to pay for car insurance?
According to a report by research firm ValuePenguin, car insurance rates are projected to increase by 8.4% across the United States in 2023, marking the largest rate hike in six years. The average cost of full coverage car insurance is expected to be $1,780 per year, but rates will differ greatly between states.
For instance, in California, Progressive has received approval for a 19% rate increase for customers renewing or purchasing new policies.
This significant increase is considered a “watershed event” by Martin Ellingsworth and is seen as a potential indicator for the rest of the industry, as Progressive is known for its accurate forecasting.
What else determines your auto insurance rate?
The factors that impact your car insurance rate include your location, driving record, credit score, age and type of vehicle. The state and city you live in can affect your premium, with different areas having varying risks.
For example, population density and theft rates can impact crash rates. Your driving history, including speeding tickets, lapses in coverage, and at-fault accidents, can also impact your premium, with high-risk drivers often facing higher rates.
Credit scores also play a role in insurance rates, with drivers with lower scores having a higher likelihood of filing claims. However, some states like California, Hawaii, Massachusetts, and Michigan prohibit using credit scores as a factor.
The addition of a teen driver, who has limited driving experience, can result in a significant increase in insurance rates. The type of vehicle you drive can also affect your premium, with more expensive vehicles to repair or replace typically costing more to insure.
Lastly, the growing popularity of electric vehicles, which require specialized parts and skilled labor for repair, is likely to increase insurance costs.
What does this mean for me?
Prepare for higher auto insurance costs and examine your policy to ensure you have sufficient coverage.
Consider this scenario: you are in an accident that causes significant harm to another person, and your policy has a $25,000 limit for bodily injury liability.
This amount might not be enough to cover medical expenses, as the cost of healthcare has increased significantly.
New Jersey and Tennessee recently raised their minimum coverage requirements for this reason, and it remains to be seen if other states will follow.
“The increase in cost of living could make minimum limits no longer sufficient, and more states may increase their requirements,” she said.
