Auto Insurance Costs Holding Steady; Average Nationwide Premium at $867

The cost of auto insurance is expected to rise by just 0.5 percent in 2006, the smallest increase in six years, reports the Insurance Information Institute.

A declining number of auto accidents, safer cars and fraud-fighting efforts are some of the forces contributing to the cost slowdown.

However, rising medical care and vehicle repairs continue to put upward pressure on rates, along with hurricane-related claims, the industry group also noted.

The average cost for auto insurance nationwide for 2006 is estimated at $867—an increase of just $4 per vehicle from last year, according to the I.I.I, despite record vehicle-related losses arising from the 2005 hurricane season. The projected increase represents a continued slowdown from 2005 when auto insurance costs rose by 2.5 percent.

“The cost of auto insurance is increasing by about one-sixth the rate of inflation and little more than a single gallon of gasoline,” said Robert Hartwig, senior vice president and chief economist of the I.I.I.

“Many people who, for example, drive safe cars, have excellent safety records and good credit-based insurance scores may see their rates go down, often by 3 to 5 percent or about $25 to $50 per vehicle. This is welcome news for drivers who have been battered by record high gas prices over the past year,” he added.

What’s more, Hartwig said, people who trade-in their expensive gas-guzzlers for smaller, more fuel efficient and less expensive vehicles may see even lower insurance costs in many cases. Smaller cars that cost less with fewer horsepower are often less expensive to insure because repair costs are less. Some insurers now even offer special discounts for hybrid vehicles.

It may also pay to just leave the car at home. “People who make the switch to public transportation may also qualify for lower insurance premiums if they no longer use the vehicle commuting and drive it significantly fewer miles each year,” said Hartwig.

Hartwig cited the declining number of auto accidents, safer cars, new auto theft technology, fraud-fighting efforts and graduated licensing laws for teen drivers as additional key factors contributing to the cost slowdown.

However, he observed that rising costs for medical care and vehicle repairs as well as defense costs and jury awards remain a problem, according to I.I.I.’s analysis.

Restrictions on the use of credit-based insurance scores in several states are also a cost threat to millions of drivers, according to its analysis.

“Insurance scores are highly accurate predictors of future loss, allowing insurers to more accurately price insurance and create a more fair and equitable rating environment for all drivers. Efforts to ban scoring will lead directly to higher insurance rates for good drivers while, ironically, lowering rates for people who are involved in the most accidents,” said Hartwig, adding that efforts by some states to restrict other underwriting factors that have been used by some insurers for decades could have a similar negative impact.

Katrina Clobbered Cars Too
Record catastrophe losses associated with Hurricanes Katrina, Rita, Wilma, Dennis and Ophelia (the five storms that hit the Southeast in 2005) and predictions by leading meteorologists of more of the same for the next 15 to 20 years are putting pressure on the cost of auto insurance in some parts of the country.

Insurers received nearly 674,000 claims for vehicles that were damaged or destroyed by last year’s storms. Those claims occurred across a wide swath of southern states and cost insurers some $3.2 billion,” said Hartwig.

Florida, Louisiana and Mississippi saw the most claims, but large numbers of claims were also filed in Texas, Alabama, Georgia and North Carolina. Even the landlocked states of Arkansas and Tennessee reported significant numbers of claims despite being located hundreds of miles from where the storms made landfall.

Weather-related damage to vehicles, including flooding, is covered under the “comprehensive” portion of auto insurance policies. Banks issuing car loans and leasing companies generally require vehicle owners to carry comprehensive coverage. People who own their vehicles outright are not required to carry comprehensive coverage, though many do. The coverage is frequently dropped, however, on older vehicles.

Claim Severity Continues to Rise
“Unfortunately, while drivers today are filing fewer claims, those that are filed cost more,” Hartwig 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, the I.I.I. reported. Higher costs for hospitalization and pharmaceuticals, and state regulations that encourage abuse of medical treatments and associated legal costs are also to blame. “Collectively, these high costs in some states more than offset the decline in accident frequency, pushing overall rates upward,” Hartwig observed.

Cost Drivers in Insurance
Medical costs are an important factor in the auto insurance market. Each year more than three million car accidents involve injuries. More than one in four auto accidents resulted in injury claims in 2003, according to the Insurance Research Council (IRC).

The average cost of a bodily injury claim exceeded $10,000 in 2005, but can easily run into the tens of thousands of dollars.

Higher jury awards in vehicular liability cases continue to put additional upward pressure on auto insurance rates. The average jury award in auto liability cases was $261,000 in 2003, according to the most recent available data from Jury Verdict Research.

“Auto insurance litigation is very expensive,” said Hartwig. “In 2004 auto insurers spent more than $4.1 billion defending policyholders from lawsuits brought against them. Auto liability issues are much more important than people realize,” he continued. “About 60 percent of auto premiums paid in 2005—almost $60 billion—was for liability coverage. As we look at 2006 and into 2007, we see this trend continuing.”

Auto theft is another significant factor that affects rates. According to the Federal Bureau of Investigation (FBI), an automobile is stolen every 26 seconds in the United States. While the number of auto thefts decreased by 1.9 percent in 2004, the first decrease in five years, there were still 1.24 million vehicles reported stolen. The good news is that preliminary FBI data for the first half of 2005 indicate that the auto theft rate fell by 2.1 percent. Declines were posted in every region except the West.

The decreases over the past two years come on the heels of a 1.2 percent increase in auto thefts in 2003, 1.5 percent in 2002, 5.9 percent in 2001 and 0.7 percent in 2000. The nation’s highest theft rates were found in the West and South, with the lowest rates occurring in the Midwest and Northeast. Automobile theft is a much bigger problem for some cities than others. Modesto, California, was the auto theft capital of the United States in 2004, with an auto theft rate nearly quadruple that of the country overall. Other problem cities include Las Vegas, Phoenix and Seattle.

New vehicle security devices, such as electronic tracking systems can help police find stolen vehicles and keep premiums down. Some insurers offer car owners these tracking systems at a special price in combination with premium discounts.

Fraud and abuse remain major problems in some states, such as New York, Maryland, Florida and Massachusetts. However, crackdowns by law enforcement agencies and insurers have put a definite dent into organized insurance fraud.

Factors Affecting What People Pay for Auto Insurance
The average driver will pay $867 in 2006. But what an individual driver pays will vary by state, insurance company and motorist characteristics.”

Factors that influence the cost of coverage may include:
* Type of car and specific safety features;
* Number 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.

For more information on auto insurance, go to the I.I.I. Web site: http://www.iii.org/individuals/auto.

Source: The I.I.I. is a nonprofit, communications organization supported by the property/casualty insurance industry.
www.iii.org