I.I.I. Reports Auto Insurance Rate Increases Dropping By More than Half

March 30, 2004

The cost of auto insurance is expected to rise by 3.5 percent in 2004, the smallest increase in four years, according to the Insurance Information Institute (I.I.I.).

The declining number of auto accidents due to better drivers and safer cars and crackdowns on fraud and abuse are behind the trend, though rising costs for medical care, vehicle repairs and skyrocketing jury awards remain a problem, according to the I.I.I. analysis.

Rising automobile theft rates and fraud will keep costs higher for motorists in some states, such as Florida, Massachusetts and New York.

The projected increase represents a substantial slowdown from 2003 when auto insurance costs rose by 7.8 percent, the I.I.I. observed. The average cost for auto insurance nationwide for 2004 is estimated at $871 – an increase of $29 per vehicle from last year or about the cost of one fill-up at the gas station these days.

“A reduction in auto accidents, combined with improved insurer financial performance are contributing to a significant moderation in the cost of auto insurance in 2004,” said Robert Hartwig, senior vice president and chief economist of the I.I.I. “Some drivers are even seeing rate decreases, especially those with the best driving records,” added Hartwig.

“Unfortunately, while drivers today are filing fewer claims, those that are filed cost more,” he said. “It costs more to repair cars, particularly following accidents involving sport utility vehicles.”

This year insurers will pay between $15 and $20 billion in medical claims, noted Hartwig. Higher costs for hospitalization and pharmaceuticals, and state regulations that permit abuse of medical treatments and associated legal costs are also to blame. “Collectively, these high costs more than offset the decline in accident frequency, pushing overall rates upward,” added Hartwig.

Cost drivers in insurance
Medical costs have played an important factor in the auto market. Each year there are more than two million car accidents involving injuries. Typical costs for treating an auto accident victim range from $6,000 to $9,000, but can easily run into the tens of thousands of dollars.

Higher repair costs are another significant cost driver today – rising at nearly double overall rate of inflation.

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 $187,000 in 1994 to $323,000 in 2001 – an increase of 73 percent, according to the most recent available data from Jury Verdict Research.

“Auto liability issues are much more important than people realize,” noted Hartwig. “About 60 percent of auto premiums paid in 2003 – more than $80 billion – were for liability coverage. As we look at 2004 and into 2005, we see this trend continuing.”

Auto theft is another significant factor that affects rates. According to preliminary data from the Federal Bureau of Investigation’s Uniform Crime Report, the number of auto thefts rose by 0.9 percent during the first half of 2003, the latest period for which data are available.

This comes on the heels of a 1.4 percent increase in auto thefts in 2002, 5.9 percent in 2001 and 0.7 percent in 2000. An estimated 1.25 million auto thefts were reported in 2002. The nation’s highest theft rates were found in the West and South, with the lowest rates occurring in the Midwest and Northeast. The largest increases in auto theft were reported in medium-size cities and suburban areas.

Fraud and abuse are major problems in some states, such as New York, Florida and Massachusetts.

Loopholes in New York’s no-fault insurance laws cost the state’s drivers an estimated $432 million in 2003 or nearly $1.2 million per day.

Factors affecting what people pay for auto insurance
The average driver will pay $871 in 2004, but what an individual driver pays will vary by state, insurance company and motorist. Factors that influence the cost of coverage may include:

· The type of car and specific safety features;
· The amount of miles driven and type of driving;
· Family claim record, including the number of accidents and their severity;
· Driving record, including speeding tickets;
· Age, gender and experience of driver; and
· Credit-based insurance score.

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