Saving pennies, risking dollars: Sticky inflation can leave you underinsured

Epic inflation rates have plagued Americans’ finances for the last three years, and while prices aren’t rising as quickly as they once were, inflation is likely to remain hot until at least the end of 2025. Car insurance holders certainly feel the effects of red-hot inflation, with many experiencing drastic premium hikes to renew their coverage. But even if you’re paying more for your car insurance each time your policy renews, it may be surprising to know that your coverage may actually be worse.

Why? Because just like your dollar doesn’t go as far when inflation is high, your insurance company’s reserves don’t go as far when covering your claims.

Slowing inflation does not equal cheaper car insurance

The latest Consumer Price Index (CPI) report shows that the motor vehicle insurance index rose 1.8 percent in April — a much-needed slowdown from March’s 2.6 percent month-over-month increase. Easing inflation is positive news, but slowing inflation does not mean car insurance premiums are dropping — just that they are beginning to rise slower.

According to CPI data, the year-over-year cost of car insurance from April 2023 to April 2024 increased by 22.6 percent. Despite paying more for your policy, inflation indirectly lowers the financial protection your car insurance provides.

How sticky inflation is still impacting car insurance in 2024

Depending on the type of car insurance you carry, your policy can pay for many things in an accident, such as damage to your vehicle, damage you cause to another driver’s vehicle and injuries. Due to record losses resulting from increased car accidents, extreme weather claims and inflation, insurance carriers have filed for rate increases to cover these unanticipated losses. However, if your coverage limit is the same as it was four years ago, you might not be comfortable with the level of financial protection you are left with.

Car insurance rates started to climb rapidly in 2023, but the services and commodities associated with car insurance began increasing much earlier. In 2021, inflation began driving up the associated costs of vehicle repairs and medical costs related to bodily injury coverage at the same time that there was a 10.5 percent increase in car crash fatalities. Below is a list of commodities and services that reflect the most significant increases over the past four years.

Medical costs have increased

Tony Cotto, public policy counsel for the National Association of Mutual Insurance Companies (NAMIC), spoke with Bankrate about how inflation is affecting car insurance premiums. “Policyholders and their insurers continue to deal with increased costs for vehicle parts and labor along with unprecedented delays in repairs, none of which they can control,” Cotto says. “Increased distracted driving, more expensive medical care and auto theft make coverage more expensive too.”

The most recent CPI data shows that medical care service costs only rose 0.3 percent between March and April 2024. Looking back to February 2020, we can see that the overall increase totals 10.1 percent. While the increase in car accidents is putting more pressure on the healthcare industry, that is not the only reason medical services have increased.

• The U.S. is experiencing a nursing and physician shortage in part due to high turnover rates and baby boomers in the industry nearing retirement age.
• The National Council of State Boards of Nursing (NCSBN) cited that around 100,000 registered nurses (RN) left the workforce between 2021 and 2022. Another 610,388 RNs plan to leave the workforce by 2027.
• Along with rising hospital labor and supply costs, drug expenses and several other factors, rising medical inflation directly impacts car insurance inflation and your level of coverage.

Your bodily injury liability, medical payments, personal injury protection, uninsured motorists bodily injury and underinsured motorists coverage pay toward medical-related costs from an accident. Drivers who choose to carry state minimal coverage or coverage limits around the 25/50/25 mark are the primary group in the greatest danger of being underinsured. According to the Insurance Information Institute, the average bodily injury liability payout in 2022 was $24,211 per accident. This reflects a $4,246 increase from the average bodily injury claim in 2020, which was $19,965.

Every car accident is different and the cost can be much lower or higher than the average. However, by increasing your bodily injury coverage to the next level, which is 50/100, you have some breathing room above the average cost of a bodily injury liability payout. This also may decrease your chance of having to pay out-of-pocket expenses if you are at fault for an accident.

Vehicle costs have increased

Although inflation has slowed drastically since its peak in 2022 (9.1 percent in June 2022 compared to 3.4 in April 2024), car ownership costs remain challenging. The rising cost of purchasing, repairing and servicing vehicles impacts the cost of the following auto insurance coverage types:

• Property damage liability
• Uninsured motorist property damage liability
• Underinsured motorist property damage liability
• Collision coverage
• Comprehensive coverage
• Rental reimbursement

Comprehensive and collision claims are paid on an actual cash value (ACV) basis. Unlike medical and liability payments, there isn’t a set limit that you as a policyholder can control. On one hand, this is positive because you generally won’t have to worry about being underinsured in terms of getting your vehicle repaired. However, auto insurance companies are absorbing these higher labor and repair costs and, in turn, are drastically increasing the costs of physical damage coverage — collision coverage in particular.

You can still be underinsured if you are at fault for an accident and need to pay for the other driver’s vehicle or if you are involved in an accident with an uninsured driver. Reviewing these limits with your insurance agent and possibly moving your coverage up to the next level may help you avoid being underinsured in both situations.

The CPI shows the price of used cars and trucks increased by 41.2 percent from February 2021 to February 2022 and new vehicle prices increased by 12.4 percent during the same time frame. However, prices have been dropping steadily over the past few years as the inventory squeeze improves. This is especially true for used cars and trucks, which show a 13.6 percent decrease from February 2022 to February 2023. However, they’re still 30.2 percent more expensive than before the pandemic-induced recession hit in February 2020.

In addition, the cost of parts and labor remains disproportionally high. Motor vehicle parts and equipment prices have declined for six straight months, but they’re still up 21.1 percent since the pandemic. Just like with medical costs, there is more to the story in terms of labor costs and physical damage loss in general:

• Data provided by TechForce Foundation shows an 11.8 percent decrease in graduates from post-secondary programs in automotive technology.
• 178,000 new positions are projected to be available for auto technicians between 2022 and 2026 due to growth in the sector, while about 413,000 positions will need to be filled due to retirement or career change.
• A rise in vehicle thefts and fraudulent claims also contribute to the pressure surrounding repair cost and physical damage coverage.
• Extreme weather is becoming more frequent and intense, causing a rise in total loss comprehensive claims from wildfire and flood loss.

According to Cotto, “ While hurricanes are more likely to trigger thoughts of homeowners’ coverage, they also have significant effects on auto insurance markets.”

How are insurers responding to lingering inflation?

Car insurance inflation is sticky and it may take a while for drivers to feel some financial relief. Insurance companies are not only trying to recoup from prior losses, but they are also hedging their bets against future inflation concerns and increasing risks from extreme weather.

Rate adequacy

Insurance companies ultimately aim to reach rate adequacy. This is when car insurance premiums are enough to cover claims and operating expenses while allowing carriers to collect a reasonable profit. Some insurance companies, such as Progressive, have already stated that after these recent rate adjustments, rate adequacy may be achieved in the near future. According to Cotto, “Matching rate to risk as accurately as possible is the core of the business of insurance. ” He added that “when insurers can match rate to risk, it provides assurances to policyholders that they will not unfairly pay for the risks posed by others.”

Reluctance to pay for rising labor costs

Most luxury vehicles require specialty auto technicians for vehicle repairs and bodywork. With a technician shortage, labor costs are at an all-time high, which has caused some insurance carriers to deny claims or only pay for claims when they are completed at cheaper repair shops. In many cases, having major repairs or even simple maintenance done by an unauthorized mechanic can void the driver’s vehicle warranty and cost them significantly more down the line. Original equipment manufacturers infringing upon a driver’s right to repair is a potential concern if labor costs continue to rise.

Reasonable vs. excessive insurance company profits

Insurance companies saw record-breaking losses after massive COVID-19 car insurance rebates and the sudden spike in car accidents and inflation. In 2022, the losses amounted to $242.93 billion, but have since started to rebound. Progressive saw a 50 percent profit and Geico boasted a $1.37 pretax gain in 2023, prompting many to ask what a reasonable profit for carriers to make is when so many policyholders are struggling.

Finding the right coverage in today’s economy

So, prices are increasing, and your car insurance isn’t giving you as much financial protection as it used to. What can you do about it? While it might not be your immediate thought, a solution exists: increase your coverage limits.

Paying a higher car insurance bill isn’t anyone’s ideal preference, especially in today’s economy. But your car insurance is integral to your overall financial health and could mean the difference between financial discomfort and financial devastation.

The rates in the table below are for full coverage — meaning comprehensive and collision are included — with varying liability limits. Your premium will be different from the example below, but increasing your liability limits can be surprisingly affordable. Based on data from Quadrant Information Services, you can increase your liability limits from 25/50/25 to 50/100/50 for just $5 more per month or $14 more per month for limits of 100/300/50, on average.

Will I be over-insured if inflation goes down?

The goal of boosting your coverage is not to over-insure yourself, but rather to make sure you carry sufficient coverage to be financially protected based on today’s costs. Unless you increase your limits significantly, you likely won’t be over-insured when the insurance market starts to level back out. In fact, keeping the higher limits may be a good thing as higher limits provide more financial protection.

Also keep in mind that these higher prices are likely to be the new normal. Insurance and other products in general, get more expensive as time goes on. The past few years of rapid fire inflation are an anomaly, but when the market returns to a healthy state, premiums likely won’t decrease dramatically. Additionally, policies renew on a 6- or 12-month term so any potential premium decreases will not be immediate. Instead, it is more likely that rate increases will slow down and household incomes will increase over time, which will help make the cost of car insurance more manageable.

In the meantime, maintaining a good driving record, considering a usage-based insurance policy, applying for discounts and comparison shopping your car insurance policy are some of the best ways to keep your current rates as low as possible. “Auto insurance is one of the most competitive markets in the country and consumers should shop around to find the coverage they feel best meets their needs,” Cotto says. “Consumers should also ask whether they qualify for any of the numerous discounts insurers offer.”

The bottom line

Slowing inflation may mean the cost of some goods and services will level out. Still, policyholders may feel the pressure of high insurance costs for reasons beyond inflation. Insurance companies are still trying to recoup some of their losses from over the past few years while also accounting for the increased risk of extreme weather. And while car accident incidences have started to slow, they are still much higher than they were before the pandemic. With economic uncertainty still very present, increasing your coverage limits may be worth considering to provide financial peace of mind. After all, it’s reassuring to know that your risk of out-of-pocket expenses in an accident is reduced. While you don’t want to over-insure yourself and inflate your premiums unnecessarily, ensuring you have the right coverage is crucial to ensure your premiums are not in vain.

Methodology

Bankrate utilizes Quadrant Information Services to analyze June 2024 rates for all ZIP codes and carriers in all 50 states and Washington, D.C. Rates are weighted based on the population density in each geographic region. Quoted rates are based on a single, 40-year-old male and female driver with a clean driving record, good credit and the following full coverage limits:

25/50/25 level:

• $25,000 bodily injury liability per person
• $50,000 bodily injury liability per accident
• $25,000 property damage liability per accident
• $25,000 uninsured motorist bodily injury per person
• $50,000 uninsured motorist bodily injury per accident
• $500 collision deductible
• $500 comprehensive deductible

50/100/50 level:

• $50,000 bodily injury liability per person
• $100,000 bodily injury liability per accident
• $50,000 property damage liability per accident
• $50,000 uninsured motorist bodily injury per person
• $100,000 uninsured motorist bodily injury per accident
• $500 collision deductible
• $500 comprehensive deductible

100/300/50 level:

• $100,000 bodily injury liability per person
• $300,000 bodily injury liability per accident
• $50,000 property damage liability per accident
• $100,000 uninsured motorist bodily injury per person
• $300,000 uninsured motorist bodily injury per accident
• $500 collision deductible
• $500 comprehensive deductible

250/500/100 level:

• $250,000 bodily injury liability per person
• $500,000 bodily injury liability per accident
• $100,000 property damage liability per accident
• $250,000 uninsured motorist bodily injury per person
• $500,000 uninsured motorist bodily injury per accident
• $500 collision deductible
• $500 comprehensive deductible

To determine minimum coverage limits, Bankrate used minimum coverage that meets each state’s requirements. Our base profile drivers own a 2022 Toyota Camry, commute five days a week and drive 12,000 miles annually.

These are sample rates and should only be used for comparative purposes.