Auto Insurance Rates Expected To Rise
5 December 2000
Auto Insurance Rates Expected To Rise: Higher Medical Costs, Court Decision And Litigation End Recent Declines, I.I.I. Reports NEW YORK, Dec. 4 Automobile insurance rates are expected
to rise by 1.5% this year, the first increase in three years. Additional
increases of 2% to 4% are likely in 2001. Among the factors driving rates
upward are higher costs to treat people injured in accidents, a sharp
acceleration in the cost of vehicle repairs, and bigger jury awards in
vehicular liability cases, according to the Insurance Information Institute
(I.I.I.). This year's expected increase will end the recent trend toward
falling prices for auto insurance. Rates fell by 3.2% in 1999 and 2.8% in
1998, the first decreases since 1973.
While many motorists with good driving records continued to see savings in
2000, many drivers-especially those with poor driving records-saw increases.
"Costs associated with settling automobile claims are on the rise," said Dr.
Robert P. Hartwig, vice president and chief economist, I.I.I. Hartwig says
medical costs are rising at their fastest pace in six years and that the
average jury award in vehicular liability cases is up 81% since 1994.
Moreover, a 1999 Illinois court decision that led many insurers to suspend
their use of aftermarket (generic) crash parts in automobile repairs gave
manufacturers of name-brand parts a virtual monopoly on this multi-billion
dollar market.
"Monopolies are invariably bad for consumers," said Hartwig. "According to
federal statistics, the cost of motor vehicle body work is rising nearly three
times faster than it was in 1999 and is accelerating. This means the price of
insurance to pay for those repairs will have to rise, too. The effective
prohibition on the use of generic parts of like kind and quality in the repair
of damaged vehicles is a factor that could ultimately add $4 to $5 billion
annually to the cost of automobile insurance," he added.
Higher medical costs have re-emerged as a major concern for insurers.
Hartwig said that the same factors that are pushing up employer health care
costs across the country are pushing up the costs of treating people injured
in car accidents. "The pace of medical inflation is up more than 50% since
1997," said Hartwig.
Hartwig also noted that sharply higher jury awards in vehicular liability
cases are putting additional upward pressure on auto insurance rates. "The
average jury award in auto liability cases rose from $175,000 in 1994 to
$316,000 in 1999-an increase of 81% -compared to and increase of just 15% in
the Consumer Price Index (CPI) over the same period," said Hartwig, adding
that liability issues are much more important than people realize. "About 60%
of auto premiums paid in 1999-nearly $70 billion-were for liability
coverages," he said.
The average auto insurance expenditure per vehicle will rise by an
estimated $10 this year to $707 compared to a decline of $7 in 1999. In 2001,
the average expenditure on auto insurance is expected to rise by $22 per
vehicle to $729. Auto insurance expenditure measures what the average
consumer actually spends for insurance on each vehicle and takes into account
many factors besides rate changes, including driving record, price trends for
new and used vehicles, eligibility for discounts, consumer automobile
purchasing trends (e.g., cars vs. SUVs), and consumer choice of elective
coverages (e.g., collision, comprehensive).
According to Hartwig, the typical two-car family in the suburbs will
probably notice the increase because it is the first in several years for most
drivers. Moreover, many families are already paying more for auto insurance
than they were a few years ago because they likely purchased at least one new
car during that period. "Expensive SUVs and trucks are accounting for an ever
higher share of vehicle sales-nearly 50% today vs. 32%% in 1987."
Hartwig noted that despite rising costs, competition between insurers will
likely help keep a lid on the cost of automobile insurance, leading to an
expected increase of just 1.5% percent in this year's average expenditure for
auto insurance. "Drivers with poor driving records will see the largest
increases-double digits in some cases," said Hartwig. Because higher medical,
repair and liability costs affect the cost of insuring all drivers, even those
with relatively good records can expect to see a modest increase in the cost
of insuring their vehicles in the year ahead.
INSURANCE INFORMATION INSTITUTE
Year Expenditure Change(%)
1990 $574 NA
1991 $596 3.8%
1992 $618 3.7%
1993 $637 3.2%
1994 $651 2.1%
1995 $668 2.7%
1996 $691 3.4%
1997 $707 2.3%
1998 $704 -0.4%
1999* $697 -1.0%
2000* $707 1.5%
2001* $729 3.0%
*I.I.I. Estimates
Source: National Association of Insurance Commissioners, the Insurance
Information Institute and the U.S. Bureau of Labor Statistics.
Factors Driving the Increase in
Auto Insurance Expenditures in 2000/2001
-- Accelerating medical inflation
-- Rapidly increasing jury awards in vehicular liability cases
-- Illinois court decision forcing insurers to suspend use of generic
parts
-- Higher costs for motor vehicle body work
-- Rising average price for new vehicles
-- Trend toward purchase of larger, more expensive vehicles such as SUVs
