Severe weather threatens to spike already rising insurance costs

Severe weather might exacerbate an ongoing surge in car insurance premiums, which continue to rise against affordability improvements across most of the auto sector.

Driving the news: Auto insurance rates for most consumers are much higher than they were last year, with drivers in some areas being especially impacted.

• The average premium for full coverage car insurance was $2,543 in June, up 26% year-over-year.

• In some states, the increase was well over 40%, such as New Jersey, where drivers with full coverage were paying $801 more on average than they were in 2023.

Zooming in: Multiple factors are complicating the insurance landscape, leading firms to protect their increasingly unstable profit margins. For one, the costs of doing business have risen rapidly for insurance providers since the pandemic.

• Auto industry shifts are chiefly to blame. Supply chain disruptions, vehicle complexity, and mechanic shortages have driven costs for repairs, parts, and car replacements through the roof.

• Insurance providers are also facing internal factors. Many are looking to recoup heavy underwriting losses suffered during 2022 and 2023.

• Meanwhile, the number of uninsured motorists continues to rise. The number of uninsured drivers jumped from 11.1% of the driving population in 2019 to 14% in 2022 as consumers looked to cut back on monthly spending during the COVID-10 pandemic.

Zooming out: Whatever the reason, this ongoing surge is poorly timed, as it seems like Hurricane Helene and Milton will drive an even bigger increase in insurance costs for many drivers. To get a grasp of how severe weather might impact the sector this year, we can look back at the damages caused by 2022’s Hurricane Ian.

• Service wait times soared in the aftermath of Ian’s landfall, as shops struggled to keep up with the pace of demand. The increased toll on repair centers also created months-long parts shortages in the areas impacted by the hurricane: in Florida alone, orders for trunk lids and liftgates soared 20 times higher than previously reported.

• The number of vehicles declared total losses spiked from 18% to 52% in the months following the hurricane. With many dealerships suffering inventory losses due to the hurricane, this placed further strain on vehicle supplies.

• All of these factors resulted in cost increases for insurers. Not only were car replacements and repairs more expensive to cover, but companies were also forced to deploy special catastrophe teams just to process the massive surge in claims, leading to higher labor costs.

Looking ahead: It may take months to fully understand the impact of this year’s hurricane season. Adjusting insurance premiums takes time, as insurers usually lag behind critical events. Unfortunately, however, long-term impacts are almost guaranteed.

• Insurers are closely studying severe climate trends. Should providers decide that severe weather is becoming more catastrophic or unpredictable, it could lead them to change their coverage or increase premiums to protect their profit margins.

• This would affect not only car drivers but dealers as well. For instance, Hurricane Helene caused damages in a wider number of states than normal, extending into Kentucky. That could lead insurance firms to expand the number of states where they require businesses to purchase products like flood protection.

Bottom line: An increase in insurance costs affects every segment of the car market, negating improvements in vehicle affordability and lower interest rates. With premiums already on the rise and a particularly devastating hurricane season disrupting business, dealers across the U.S. should expect these factors to create long-term complications rather than temporary hiccups.

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