Rising auto insurance premiums have been a notable driver of inflation in the past few months. In April, auto insurance jumped 22.6% from a year earlier, the largest increase since 1979, Stephen Juneau, an economist at Bank of America Securities, noted in a recent note.
“This has been an increasing driver of flat core CPI inflation, which remains high at 3.6% y/y in April,” he wrote. While the rising cost of car insurance is not a recent trend, it has played a larger role in raising the CPI for basic services excluding rent and rental equivalents for owners, also known as superservices.
Motor insurance contributed 2.3 percentage points to the 4.9% annual increase in the CPI for premium services, while all other components contributed 2.6 percentage points.
“The strong increases in auto insurance premiums are a response to underwriting losses in the industry,” Juneau said. Factors leading to those losses include rising vehicle prices (new and used), increasing repair costs for both technology and labor, and a higher number of accidents as driving patterns return to normal.
Remember, supply chain disruptions caused by COVID-19 have sent vehicle prices higher even as Americans drive less due to remote work and most leisure travel comes to a halt during the worst of the pandemic.
The good news is that auto insurance rate growth appears to be about to slow. “There are signs that many insurance companies are returning to profitability,” Juneau said. “In addition, auto prices have regained some of their previous increases and wage growth in the industry has slowed. This does not mean your insurance premiums will decrease, but we believe the rate of increase should slow.”
The next major data point the Fed will look to gauge inflation is the personal consumption spending numbers in the personal income and expenditure report scheduled for release on Friday. In this index, auto insurance increases were modest, which partly explains the gap between CPI core services inflation numbers versus PCE inflation – +4.8% in March for CPI versus +3.5% for PCE. However, both are significantly higher than the pre-pandemic rate of 2.0%.
“We believe further improvement in this total is one of the keys for the Fed to become more confident in the process of fighting inflation and starting the tapering cycle,” Bank of America’s Juneau wrote. “Until then, we expect the Fed to keep interest rates where they are.”
The core personal consumption expenditures index, which excludes volatile food and energy categories, is expected to rise 2.8% year over year in April, the same increase as in March, according to TD Economics.
As insurance premiums rose, shares of property and casualty insurance companies also rose. Last year, Allstat (New York Stock Exchange: All(rose by 41% and Geico's parent company Berkshire Hathaway)New York Stock Exchange:BRK.B) (New York Stock Exchange:BRK.A) by 25%, both of which exceed the S&P 500's 27% increase over the same period. travelers (New York Stock Exchange: TRV), while it increased by 18%.
In the Property & Casualty insurance sector, SA's Stock Screener rates seven stocks at Strong Buy, with Allstate (ALL) topping the list.
