When could auto insurance prices peak?

Perspectives from BofA Global Research Leading Analysts

Josh Shanker

Josh Shanker, Senior Research Analyst, U.S. Insurance

The price of U.S. auto insurance has continued accelerating through 2023 into 2024. According to the CPI (Consumer Price Index), the cost of insuring a car in the U.S. rose by 1.6% in December 2023, up 20% from the year prior (compared with broad-based CPI up 3.4%) and up nearly 37% over the preceding two years, the sharpest two-year increase since 1977. April 2024 CPI data reveals that auto insurance premiums continued to increase, up versus March and with similar year over year increases.  From July 1975 to July 1977, the price of motor vehicle insurance rose 48%, compared to the broad CPI, which was up a much lower 13% over the same stretch. There aren’t too many investors with a keen grasp of the 1976 auto insurance market around today (paging Mr. Buffett), but this is probably the proper antecedent for today’s personal auto marketplace with, a 38% increase in the price of auto insurance relative to broad-based CPI up 8% over the past two years. As a frame of reference for current investors, the most significant two-year increases in U.S. motor vehicle insurance in "contemporary times" were 19% from June 2001 to June 2003 and 18% from February 2016 to February 2018. We mention this historical context to recognize that what is currently happening in the U.S. auto insurance market is more infrequent and thus a once-in-a-generation event.


Insurance prices are up because loss costs have risen materially, driving U.S. auto insurers into underwriting losses out of which they intend to escape through material repricing efforts. April 2024 CPI reveals that the rise in motor vehicle repair costs declined a touch, but costs are still up 7.6% over the preceding 1-year and up 21% over two years. Prices for used cars and trucks are down 7% for the year and down 14% over two years. While the prices of used cars and parts are down over the past couple of years, this trend is an "epilogue" to a prior theme where the price of used cars rose 50% during the pandemic (2Q20-1Q22).


With the ongoing repricing efforts, an argument can be made that auto insurance pricing is catching up to loss trends, creating a risk that the market will begin to become more competitive. The risk is a bit counterintuitive as it would likely result in a significant increase in current profitability across the auto insurance industry, which would eventually likely trigger price cuts. When presented with a material price increase, some customers will seek to save money by leaving their incumbent carriers while others may opt to buy down to a coverage with lower limits to save money. As the market would become more competitive, the opportunity to take market share from customers unhappy with their incumbent carrier would decline. While we believe this risk is still valid, we believe it is more a 2H25 or 2026 risk rather than anything that will appear in 2024. We don't believe carriers are likely to stop raising prices in 2024. We expect auto insurers to reach peak underwriting margins in 2025 but believe the slope of that improvement will be steeper in 2024.