new York
CNN
—
Are you looking for a new car? Then you’re in luck. Are you looking for new car insurance? Then you better buckle up.
Prices for new and used cars, as well as rental cars, continue to fall, while car insurance premiums continue to rise sharply. This trend seems counterintuitive: If the price of a car goes down, shouldn’t the cost of insurance go down too?
If only it were that easy.
“It’s a mosaic of factors that affect the cost of auto insurance,” says Scott Shapiro, head of KPMG’s U.S. insurance practice. “While there is a general correlation between the price of the vehicle and the insurance for property damage, there are other factors besides the price of the car that affect the cost of premiums.”
For example, nearly 41,000 people died in car accidents last year — 8,000 more than in 2013, the National Highway Traffic Safety Administration estimated. This has led to a rise in claim amounts that are well above historical averages due to their severity, according to data from LexisNexis Risk Solutions.
According to the Consumer Price Index released on Wednesday, car insurance premiums rose 18.6 percent in the 12 months through July. That was the third-largest price jump in the past year for all goods and categories covered by the Consumer Price Index.
Still, that’s an improvement from March, when auto insurance premiums rose 22.2% annually. The last time auto insurance premiums rose that much annually was in 1976.
But just like with economy-wide inflation, where the pace of price increases has slowed, the actual dollar amount consumers are paying for goods and services is much higher than it has been in recent years. But with cars, consumers are paying lower prices. That means price increases have not just slowed, car prices have actually fallen.
Used car prices fell by 10.9 percent last year, the third-largest price drop of all goods and categories covered by the consumer price index. Rental cars and new cars also became cheaper, with prices falling by 6.2 percent and 4.4 percent respectively.
The sharp drop in used car prices is a “direct reflection” of the new car market, said Ivan Drury, director of insights at Edmunds, in an analysis released Wednesday. Dealers are taking longer to sell new cars compared to last year, leading to discounts that are $1,000 higher on average. “A buildup of new cars on the lot last year was the catalyst for discounts and incentives for aging inventory,” he added.
This could ultimately translate into lower insurance premiums, says Josh Damico, vice president of insurance operations at Jerry, an app for saving on car insurance.
“Auto insurance premiums have lagged behind factors like vehicle and repair prices, so insurers have had to play catch-up over the past year or so,” Damico told CNN. While auto repair costs are up 3.4% year over year, they have cooled significantly since last July, when they rose 12.7% annually, according to CPI data.
With costs stagnating, “many insurers are rethinking their pricing, and some have already reduced their premiums,” he said.
