There’s a good chance your car insurance has gone up recently. If it has, you’re not alone. The average cost for car insurance is up 19.1% compared to the same time last year, according to recent data from the U.S. Bureau of Labor Statistics.
If your rates are up, money expert Clark Howard says it’s time for you to re-shop your car insurance. In this article, we’ll look at reasons why car insurance is going up, how re-shopping can save you money, and a few other ways to save.
This article was updated in September 2023 and I review it every 12 months. Detailed notes on all updates can be found here.
Why Car Insurance Rates Are Going Up
The average annual cost of car insurance in the U.S. is around $1,780. But what you pay might be much higher or lower. Drivers in Michigan — for example — face the highest rates for car insurance with a state average of $4,788. Meanwhile, drivers in Vermont have much lower rates with a state average of $1,104.
What you pay depends on many factors like where you live, what you drive, and your driving history. But even if none of these things change, you still might see changes to your car insurance premiums this year. So, what’s driving up the rates?
Here are a few key factors:
Accident Damages Are More Costly
“The auto insurance market is in a world of hurt because the cost of repairing vehicles has gone up a whole lot in recent years,” says Clark.
Supply chain disruptions throughout the pandemic led to some of the highest inflation rates for motor vehicle maintenance and repairs in decades. But using data from the U.S. Bureau of Labor Statistics (BLS), NPR reports that, “the cost of vehicle repairs has risen faster than inflation since 2012.”
Data from the BLS shows that the rate for motor vehicle maintenance and repair in January 2023 was up 14.24% from the same time last year. To make things worse, repairs take longer to complete these days. According to the Wall Street Journal, “The average auto repair took more than 17 days to complete last year, up around 65% from 10.3 days in 2019.” As the cost to repair and replace vehicles goes up, so will insurance rates.
“Insurers [are] facing these much higher costs for repairing vehicles that are repairable, paying for your rental vehicle that you’re in a lot longer because the repairs are taking longer, totaling a vehicle and having to pay you more money…the math is not working for them. So that’s why people are getting these very large increases in costs at renewal time for auto insurance.”
Insurance Companies Rate Policyholders Differently
To insurance companies, every policyholder is a risk. So, before they offer you insurance, insurance companies try to calculate just how much of risk you are. Companies use what is known as rating variables to do this.
The Insurance Information Institute (III) notes that, “in auto insurance typical rating variables include driver age, gender, and accident history as well as the model year of the vehicle being driven.” Other rating variables can include:
- Household (ex: several drivers under 25)
- Marital status
But, the thing is different companies might use a different combination of variables. Some companies may use more variables than other companies. And companies can weigh each variable differently as well. So, even if two companies consider the exact same things, one company might view you as more risky than the other.
“One insurer may look at me as a much higher risk or charge me much more money based on the risk profile I am than another insurer.”
Insurance Companies Reinvest Premiums
When you sign up for insurance, you enter into a contract with your insurer. In exchange for paying a premium, your insurer offers you financial protection against greater losses from covered events.
But insurance companies don’t just take on financial risks. They diversify risks by reinvesting the money made off of premiums into other areas.
“The factor no one ever talks about is that the way insurers ultimately make their money is off investments,” Clark says. “And their investments cratered along with the rest of us experiencing what happened with the marketplace.”
How an insurance company reinvests its collected premiums will vary from company to company, which means different companies may be experiencing more or less financial impact depending on their investments. As a policyholder, this difference will impact you.
“And this is the key thing for you to know: the cost of insuring your vehicle right now has a bigger disparity from one insurer to another than it normally would.
Because different insurers are having different experiences with their investment portfolios, they have had different experiences with overall claims and costs associated with those. There are bigger disparities and bigger benefits to you shopping your auto insurance.”
So, what can you do if your insurer is raising your rates? Keep reading for tips on shopping around and other ways to save.
How To Save on Car Insurance
There are many reasons why your car insurance might go up, but there are also several ways to save money. Here are four to consider:
1. Shop Around
Shopping around for car insurance is one of the best ways to be sure you’re getting a good rate for coverage. When it comes to car insurance, Clark explains that, “the way you’re rated by one insurer, or the way premiums are set for your driving profile with one insurer could be very different — will be very different — from another insurer, and another, another, like that.”
Additionally, since companies reinvest premiums differently, you can expect to pay different rates from company to company for the same amounts of coverage. And when shopping around, the key to getting the best deal is to make sure that you’re comparing the same amounts of coverage.
For example, if Company A gives you a quote using $100,000 of coverage per accident in property damage, see how much Company B will charge for a policy with $100,000 of coverage per accident in property damage. Otherwise, you risk getting a lower rate along with less coverage.
“Don’t take low coverage limits just to get a lower premium. Make sure you have adequate coverage.”
Clark once shared the story of a successful surgeon that highlights the danger of being underinsured.
“He bought state minimums on insurance. His teenage daughter had an accident that caused severe injuries to someone in another vehicle. Her fault and it bankrupted the family.” Clark recalled. “So make sure you have those adequate coverages as you shop around and get quotes, but get those quotes.”
2. Ask About Discounts
In addition to comparing rates for the same amounts of coverage, be sure to find out what discounts an insurer offers that might save you even more money. Here are a few common discounts that many companies offer:
- Accident and/or ticket free
- Defensive driving course completion
- Policy bundling
- Vehicle safety features
But there are many other discounts out there! If you work from home or don’t drive often – for example – many companies offer discounts for driving lower-than-average miles per year. You may also find discounts for federal employees, military affiliation, environmentally friendly vehicles, having multiple cars covered by the same company, and customer loyalty.
Be sure to ask about discounts while you’re shopping around so that any potential savings are reflected in your quote. But remember: The company with the most discounts might not have the best deal.
This was my experience recently when I re-shopped my car insurance. Although my insurer at the time was offering more discounts — including one for customer loyalty — I was able to save much more by moving to a new insurer.
3. Raise Your Deductible
You can save money on your car insurance if you’re willing and able to take on higher deductibles. According to the Insurance Information Institute, “increasing your deductible from $200 to $500 could reduce your collision and comprehensive coverage cost by 15 to 30 percent.”
But Clark suggests a $1,000 deductible if you can afford it.
“The reason for the $1,000 is that insurers have a big cost for processing claims. Not just paying them, but processing them. If they don’t have to worry about you for something that’s hundreds of dollars instead of thousands of dollars, then they’re going to give you a lower premium for that.”
4. Avoid Small Claims
It’s no secret that your car insurance will probably go up after you file a claim.
“Claims really hurt you,” warns Clark. “[If] you make a small claim against your auto insurance, it’s going to eat up your wallet for years to come and make it tough for you to comparison shop with other insurers.”
You can read Clark’s rule for using car insurance and advice on when you should file a car insurance claim here.
Even if nothing has changed on your end — you haven’t moved, gotten a speeding ticket or been in an accident — there’s a chance your car insurance will go up this year. This is partly because car accidents are more severe across the country, and it’s more expensive to repair or replace vehicles now.
But it’s also because auto insurance companies make their money off investments, which has, “led to cost pressures that vary per insurer,” explains Clark.
And this is exactly why I re-shopped my auto insurance recently. Although I haven’t moved or had any driving incidents, I got notice earlier this year that my car insurance would be increasing by 21%. After shopping around, I found equal coverage that’s going to save me $480 annually.
September 2023: Reviewed and updated all statistics in the article to reflect the most current data available for car insurance-related rates; added a new section to the article titled Insurance Companies Rate Policyholders Differently.