Why Do Car Insurance Rates Keep Going Up?

Over the past few decades, the consumer auto insurance industry has become a lot more competitive. In addition to the emergence of new companies that offer car insurance, the entire process for obtaining coverage and/or a quote has become simpler, faster, and more convenient for Americans. And with so many insurers advertising low prices for auto insurance, you’d think that the cost of premiums would be dropping.

In fact, the average cost of car insurance is getting higher, not lower. The Insurance Information Institute reported that from 2008 to 2010, auto insurance rates jumped by an average of 10% — and then rose another 4% in 2011. Altogether, average auto insurance costs have skyrocketed 31% since 2000.

This seems to go against everything that Americans’ learned in their economics classes. If supply (the number of auto insurers) has increased, then why aren’t costs decreasing?

The reason is because the actual costs associated with paying claims have risen dramatically over the past decade or so. More specifically:

• Car repair costs have increased. All those fancy technological improvements that have been made to vehicles? Many of these components cost more to fix when they get broken in an auto accident. As a result, the average total auto repair bill has gone up.

• Medical costs have surged. Health care costs continue to climb due to a higher incidence of disease from an aging population and unhealthy lifestyles. When you add in exorbitant medical malpractice judgments and the superfluous tests begotten by a fear of lawsuits (as well as additional taxes and fees imposed by health care regulations), you get higher patient medical bills that must be paid for by auto insurers to claimants who are injured in collisions.

• More uninsured drivers are on the road. Almost 1 out of every 6 drivers is reportedly uninsured. When they cause accidents, companies who insure the victims have to eat the costs — and these insurers then turn around and pass these costs onto all of their customers in the form of higher premiums.

• Legal fees and court-imposed damages have risen. Sometimes, lawyers file frivolous lawsuits in an attempt to get more money from insurance companies. Other times, insurers refuse to pay claims even though they are legally obligated to do so. The end result is more lawsuits and higher legal costs associated with paying out auto insurance claims.

• Accidents in certain demographic groups have increased. If you live in a geographical area, fall into an age classification, or drive a specific vehicle category that has seen a rise in auto accidents nationwide, then your premiums will increase as a result — even if your personal driving record is spotless.

Is there anything you can do to combat these auto insurance price hikes? Here are a few suggestions:

• Get "pay-as-you-drive" insurance. This involves installing a device in your vehicle that records your personal driving habits and patterns, and then sets your insurance rates accordingly. This way, you can avoid the "guilt by association" cost increases if your peer group is prone to more accidents.
• Revisit your policy. There may be some discounts for which you are eligible that you didn’t know about.
• Be proactive. Taking a driver’s education course or adding an anti-theft device to your vehicle can lower your auto insurance premiums.
• Shop around. Since insurers target different driving demographics, another auto insurance company might offer you a lower rate.
• Stay safe. Continue to obey the law and avoid accidents. After three years, you may be eligible for safe driver discounts.