The true cost of auto insurance in 2022

Prices of car repairs and replacements are higher than ever thanks to historically high inflation. And recently, several insurance companies have increased premiums by around 7% to keep ahead of inflation, according to the Wall Street Journal. Last month, the Federal Reserve increased the price of borrowing money by a quarter point and announced its intention to hike rates six more times in 2022. While this move could help reduce inflation by discouraging spending, the higher cost of borrowing could negatively impact consumers with car loans, mortgages and more. So what does inflation mean for your household’s budget?

Zachary Finn, Director of Risk Management at Henriott Group, told Bankrate that “every ingredient in the recipe for an auto claim is more expensive” amid high inflation. Ongoing supply chain issues mean car parts could be stuck on backorder for weeks, Finn says. Longer wait times for vehicle repairs could mean you’ll need a rental car for longer, at a time when “travel is experiencing a post-COVID pop.” According to Finn, elevated rental car demand and higher vehicle repair costs means higher insurance premiums.

But Finn emphasizes that consumers can take steps to protect their wallets. “One of the dials consumers can adjust to lower their premium is to look at a higher deductible,” Finn says. “A willingness to take a bigger bite of the loss is something insurance companies love to reward.” He says “Another dial consumers can adjust is to switch to an insurer that offers a pay per use/mile premium plan.” Finn is careful to note that this solution likely only works if you plan to drive less, but if your workplace gives you the option to work from home for a few days a week, a low-mileage insurance plan could save you money.

Historically, insurance underwriters have evaluated how risky an applicant would be to insure based on certain key characteristics. Now, some companies are striving to make the risk-assessment process more accurate through artificial intelligence (AI). For instance, car insurance company Root uses a driver’s actual driving behavior as the primary factor for determining their car insurance premium. The company allows drivers to take an in-person driving test and tracks their habits electronically to decide whether to insure the driver and what premium to assign them.

More personalized underwriting systems like Root’s are meant to help policyholders pay a fairer price for their insurance rather than a rate based solely on their demographic. But is AI underwriting the way of the future?

Jon Godfread, North Dakota Insurance Commissioner and Secretary-Treasurer of the National Association of Insurance Commissioners (NAIC), told Bankrate that while many insurance companies use AI in underwriting, it’s not yet mainstream. Several issues must be resolved before AI can be adopted across the board, he says. To reach widespread use, Godfried believes companies will need to confront “the potential for bias in the data” and nail down “where that data comes from.” He also warns that the market may not yet trust the results from AI rating and underwriting. Overall, Godfried predicts that “we are at the very early stages of what could be a technological revolution for the insurance industry.”

In addition, California, Hawaii and Massachusetts prohibit the practice of using credit to determine premiums. In Michigan, insurers cannot use your credit score to determine your rate, but they can use some of the information that goes into your credit score, such as a history of late or missed payments. In other states, lawmakers, activists and economists increasingly see credit scoring as economic discrimination. Last year, legislation around the issue was introduced in Colorado, New York, New Jersey and Oregon, according to NBC News. And legislation in Washington is ongoing about whether to confirm a ban on insurers using credit scores. With more visibility on how rates are calculated, continuing legislative progress is possible.

Shortages in the availability of semiconductors, also called “chips,” have caused used car prices to surge. As of February 2022, used car prices are 41.2% higher than the same month in 2021. The U.S. Labor Department’s Bureau of Labor Statistics reported that gas prices have spiked by 38% between February 2021 and February 2022. While gas prices were already rising due to high inflation, this gas spike can also be attributed to events currently unfolding in Europe. You might be wondering: are skyrocketing prices permanent or temporary?

Greg McBride, Bankrate’s chief financial advisor, says “Inflation is still accelerating and there are no indications we’re at a peak level. With higher prices for commodities such as food and oil, and renewed supply chain issues, inflation is likely to get worse before it gets better. There is hope that prices will level off and inflation will recede later in the year, but so far it is nothing more than hope.”

According to McBride, consumer prices are increasing faster than incomes, which puts a squeeze on household budgets. He explains that “High prices may not limit how much consumers spend, but rather, where they spend their money. The more money that goes into the gas tank and is spent at the supermarket, the less money left over for discretionary spending.”

McBride also predicts that Americans will postpone building their savings in favor of spending on travel and other experiences that were unavailable during the pandemic. “Add in the squeeze that inflation is putting on the household budget, and it will make it all the more difficult to make headway on savings,” McBride explains.

Outside of inflation and broader economic trends, many factors that affect your car insurance premium are within your control. Personal characteristics like your driving record, claims history and geographic location affect your premium significantly. If you have a less-than-ideal driving record, you may want to ask your insurer if you can take an approved driver safety course or enroll in a telematics program to earn a discount on your premium. If you live in a high-cost area, you may want to consider relocating within your metro. It may be useful to talk with your friends and family about how they keep their car insurance costs low, or to chat with an independent insurance agent who may be able to help you find a cheaper insurance provider for you.