Understanding the Factors Behind High Car Insurance Premiums

Rising premiums have affected drivers globally
From inflation costs to supply chain issues, understanding these factors helps consumers better navigate car insurance and make informed decisions

Car insurance premiums have been on the rise lately, and it's starting to pinch the pockets of many drivers. But what exactly is going on? Let's dive into a couple of the details and uncover the factors behind the price hikes.

Inflation and Repair Costs

Inflation is a major driver of rising car insurance premiums. In the US, the average cost of full coverage car insurance rose to $2,543 per year, a 26% increase over the past year. Similarly, in the UK, the Association of British Insurers (ABI) reported a 25% increase in motor insurance premiums in 2023 compared to the previous year. The cost of repairing vehicles has surged due to higher prices for parts and labour. Modern cars, equipped with advanced technologies such as sensors and cameras, are also more expensive to fix.

Symon Weedon, the Schemes Director at Towergate Insurance Brokers says, "The advanced technology in modern vehicles, such as dashcams, built-in cameras, and crash prediction systems, while making cars safer, also makes repairs more expensive due to the complexity involved and the need for specialised components." 

Weedon also notes, “Labour shortages, particularly in skilled automotive repair and EV specialist roles, have further exacerbated the situation. The labour force reduction has led to increased costs for staff retention and rising payroll expenses. Specialist EV engineers demand higher employment costs due to their scarcity.

Increased Accident Rates

Accident rates have climbed, partly due to the increased use of mobile devices while driving, leading to more distracted driving incidents. Post-pandemic behaviour has seen more reckless driving patterns as people readjust to regular road traffic​​. Higher accident frequencies result in more claims, prompting insurers to raise premiums to cover these costs.

It is important to note, that medical expenses also have been rising, which means higher costs for insurance companies when they cover injuries from accidents. In 2023, the average medical cost per claim reached nearly US$20,000, up from US$17,000 just five years ago.

Supply Chain Disruptions

The COVID-19 pandemic has disrupted global supply chains, causing shortages in new and used cars. This scarcity has driven up the cost of car parts and vehicle replacements, further increasing the cost of car insurance. Additionally, the rise in car hire costs due to vehicle shortages has added to the financial pressures on insurers. 

Weedon notes, "Semiconductor chips used in this technology are in short supply, with some vehicles containing over 1,500 chips. This shortage leads to higher repair costs. For example, a simple bumper repair may now involve replacing additional electronic components for crash systems and cameras."

“The rise in energy costs has also had a significant impact, and have affected various industries, including automotive repairs. Higher energy costs increase the operational expenses for repair shops, from lighting and heating to powering equipment. These increased costs are subsequently passed on to consumers in the form of higher repair bills, which insurance companies must cover.”

Reinsurance Costs

Reinsurance, a crucial part of the insurance ecosystem, involves insurers transferring a portion of their risk to other insurance companies. This process helps spread risk and ensures that insurance companies remain financially stable, especially in the face of large-scale claim events. However, the cost of reinsurance has been rising, and this increase directly affects the premiums that consumers pay. 

These hikes could be attributed to the increased frequency and severity of natural disasters: The frequency and intensity of natural disasters have been rising due to climate change. Events like hurricanes, wildfires, and floods lead to significant insurance claims, increasing the risk that reinsurers must cover. For example, in 2023, natural disasters globally caused insured losses of around US$140bn, a sharp increase from US$100bn just five years ago.

Global economic uncertainties, including inflation and market volatility, also make it more expensive for reinsurers to predict and manage their risk exposures. Inflation rates, which have been fluctuating around 3-4% annually, impact the overall cost of claims, thereby increasing reinsurance costs. Additionally, the COVID-19 pandemic led to a surge in insurance claims, ranging from business interruption to health-related costs. This unprecedented event has added pressure on reinsurers to adjust their pricing models to accommodate such large-scale, unexpected claims.


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