Auto insurance rates are rising at the fastest pace in nearly 50 years—here's why

The cost of auto insurance is rising at the fastest pace in nearly 50 years, putting more strain on American households already struggling to make ends meet.

According to the Department of Labor, motor vehicle insurance rates increased by 1.3% in September and a mouth-dropping 18.9% year-over-year.

Think that’s bad? In August, annual auto insurance rates surged by 19.1%—the largest increase since 1976.

The numbers are even worse when compared to average underlying inflation, also known as the consumer price index (CPI). Annual CPI increased by 3.7% in September, following an identical increase the month before.

So, why are insurance rates so much higher than underlying inflation? It’s complicated, according to industry insiders.

The insurance industry’s “perfect storm”

Auto insurance is being driven higher by a “perfect storm” of factors like supply-chain bottlenecks, a shortage of auto parts, and higher consumer demand, according to Charlie Chesbrough, a senior economist at Cox Automotive.

Higher repair costs and a lack of workers also contribute to costlier claims and more expensive premiums, Stephen Crewdson, an executive at research company J.D. Power, told The New York Times.

That's on top of the post-pandemic travel boom and return-to-office mandates that have brought more cars onto the roads.

According to Robert Passmore, vice president of personal lines with the American Property Casualty Insurance Association, bad driving habits acquired during the pandemic, like speeding, have contributed to more accidents.

Then there’s the more obvious reason premiums keep rising: New and used car prices have soared since the pandemic. It’s not just a supply-chain issue, either—cars have become a lot more advanced, which means the cost of repairs (and insurance) has gone up.

While many of these issues persist, economists say there’s reason to be optimistic that the worst is behind us.

Understanding “lag”

With new car prices finally trending lower and used car prices expected to do the same, consumers may soon catch a break on their insurance bills.

Auto insurance rates generally track car prices, but there’s a lag.

“The pass-through takes a while,” Stephanie Roth, senior economist at J.P. Morgan Private Bank, told CNBC.

“Vehicle insurance inflation lags new car prices by about a year, and the sustained downshift in new car inflation means that insurance prices are set to slow markedly, but it hasn’t happened yet,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

We’re also getting to the point where consumers can no longer afford higher premiums and may decide to shop around or look for alternative transportation entirely.

"They’ve really juiced up those premiums,” said Mark Zandi, chief economist of Moody’s Analytics. At some point—and I think we’re getting there—people are going to balk.”