According to James Lynch, chief actuary, vice president of research and education at the Insurance Information Institute (III), there are five main factors responsible for frequently rising auto insurance rates.
- More miles driven.
Not surprisingly, the number of accidents is directly related to how much people are driving. “When you go into a recession, a lot of people get laid off, and when people get laid off, they don’t drive,” Lynch says. “A car that’s in the garage isn’t really exposed to accidents as much as a car that’s out on the highway.”
When the economy turned around in 2014, “we started to see more miles being driven countrywide, and that correlates strongly with an increase in claims frequency,” Lynch says.
- Legalized Marijuana.
In Colorado, Nevada, Oregon and Washington, where recreational marijuana is legal, collision claims frequency is about 6% higher, according to 2018 research from the Insurance Institute for Highway Safety and the Highway Loss Data Institute.
The studies compared the frequency of collision claims per insured vehicle to the control states of Idaho, Montana, Utah and Wyoming, based on collision loss data from January 2012 through October 2017. Analysts controlled for differences in the rated driver population, insured vehicle fleet, mix of urban versus rural exposure, unemployment, weather and seasonality.
Although recreational marijuana is currently legal in only 10 states, medical use is legal in 33 plus Washington, D.C., and more states are expected to follow suit in the years ahead.
Why is that such a big problem for the auto insurance industry in particular? Unlike alcohol, “where the amount of alcohol on your breath is a pretty good proxy for the amount of alcohol in your blood,” Lynch says, there’s not yet a reliable method for testing whether someone is high behind the wheel.
“Legislators and taxpayers need to understand that legalizing marijuana is not free money cascading down from heaven,” Lynch cautions. “It is a public policy choice, and there’s a downside: There will be more accidents, and your insurance rates will be marginally higher, and people will die and be injured because of the legalization of this drug.”
“Those types of choices happen all the time in public policy,” Lynch adds. “We just point out that this involves choices, too.”
- Distracted Driving.
Nearly 80% of vehicle crashes involve driver inattention, according to research conducted by the Virginia Tech Transportation Institute.
Although eating and drinking, talking to a fellow passenger, applying makeup, programming a GPS or navigation system, or simply adjusting the radio all qualify as distracted driving, using a cellphone is undoubtedly the biggest concern: According to a study conducted by Cambridge Metrics Telematics last year, phone distraction occurred in 52% of trips that resulted in a crash.
“With the development of smartphone technology, distracted driving is clearly on an increase, although it’s tough to quantify and measure,” Lynch says.
And it’s perhaps an even greater concern in commercial auto than it is in personal, says Art Seifert, president of Glatfelter Program Managers, a division of Glatfelter Insurance Group. “Because of the rise of internet sales, you have more 18-wheelers on the road than ever before. And because trucking companies are having a very difficult time recruiting new drivers, you also have younger, less experienced drivers behind the wheel,” Seifert points out. “Combine those facts with distracted driving, and you have a very lethal combination.”
- Higher Speeds.
Throw in the fact that people are driving faster now than they ever did before, and the situation becomes even more dire. Quite simply, “speed kills,” says Lynch, who notes that speed limits have been increasing for four decades, particularly during the recent recession.
Consider a highway with a speed limit of 70 mph that used to be only 55 mph. “Most people are driving about 75-80 mph, and if you do that math on that, that means you’re driving 40% faster,” Lynch points out. “When you have an accident, the force that’s expended in the accident is proportional to the square of the speed.”
The square of 1.4, or 40%, is basically 2, Lynch explains – which means “the force generated by the accident has doubled,” he says. “Even though we make cars safer today, you can’t get past that problem.”
- Increasing Repair Costs.
Safer cars themselves are responsible for the final factor. Crowley says claims that used to be $3,000-$4,000 are now $10,000-$12,000. “Minor fender benders are causing significant damage dollar-wise to multiple vehicles,” he observes. “Today’s cars keep you safe in a bubble in the middle, but they’re basically plastic, and they’re just folding up like accordions.”
“There’s a lot of technology to help prevent accidents nowadays, but when they happen, they’re so much more expensive to repair,” agrees Doug Fairbanks, a commercial auto agent at Hartland Insurance Agency, Inc. in Hartland, Michigan. “If someone drives into the front of your car and rips the bumper cover off, 10 years ago that would have been a $500 repair. But if you have an electric vehicle and the charging brain for the car is mounted to the bumper cover, that turns into thousands of dollars.”
Repair costs correlate directly with not only the sophistication of a vehicle’s technology, but also where that technology is located. “If you have sensors, they’re probably along the perimeter of the car,” Fairbanks points out. “That’s what gets hit in small accidents.”
In the event that an accident damages a sensor, repairs will involve not only replacing that sensor, but re-calibrating it, Lynch adds – and then, “you have to run diagnostics because of all the computer code within the vehicle,” he explains.
Consider this: Whereas a Boeing 787 has 7 million lines of code and Facebook has 60 million lines of code, a 2016 Ford F150 has 150 million lines of code. “Whenever you have an accident, you have to scan all the electronics before and afterwards, and all those costs keep increasing,” Lynch says.
Then again, the average vehicle on the road in the U.S. was 11.6 years old in 2017, when only about 5% of the fleet incorporated driver assist technologies like automatic braking and lane departure sensing, according to Progressive. But the increasing cost of auto repairs doesn’t depend solely on the kind of tech that will eventually become standard in autonomous vehicles.
“Driverless technology is a good example of the increasing complexity, but it’s not just that. Everything about the way vehicles are built is more expensive – even the sound system or the door,” says Lynch, who notes that an automatic door in a minivan could cost up to $3,000 to repair.
Increasing claims severity is a persistent auto insurance pattern that III has tracked going back 50 years. Whereas accident frequency goes down about half a percent a year on average, “the long-term trend for the cost of a claim is to go up considerably faster than the rate of inflation,” says Lynch, who cites III data showing that between 1963 and 2013, the average size of an auto property damage claim increased a shocking 1,666%.
“It’s enormous, and bodily injury follows similar trends,” Lynch says. “There’s no reason that trend should stop – it’s been going on for 50 years. It’s because autos get safer, we do a better and better job of protecting ourselves, but doing that costs more money.”
Article by: Jacquelyn Connelly