What’s going on with car insurance?

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Ethan Wu (0:36)

Thank Pushkin.

Inflation's hot, I'm sure you've heard. The Consumer Price Index has risen 8% in the past year and a half, which is pretty sweltering. But there's one category that really stood out to me recently, and that's auto insurance. This in the past year and a half is up 23%, just a staggering number. I think there may be a lesson here about inflation dynamics generally, and about a word that seems to be on everybody's lips these days, greedflation.

This is Unhedged, the new markets and finance show from the Financial Times and Pushkin. I'm reporter Ethan Wu here in the New York studio, joined by AlphaVille reporter, Alex Skaggs.

Alex Skaggs (1:17)

Thanks for having me.

Ethan Wu (1:18)

Absolutely. Alex, just since this is our first time with someone from the AlphaVille universe, what is AlphaVille?

Alex Skaggs (1:24)

That's a great question.

AlphaVille is a finance and markets blog. We also write about economics, basically a little bit of everything. We're a little bit chattier than the main FT. We get to have a little bit of fun, lots of analysis, lots of deep dives. I think the question is more, what is AlphaVille not?

Ethan Wu (1:42)

Well, perfect for the unhedged universe. We're trying to meld these together. Alex, you've written twice in AlphaVille recently about auto insurance and just the staggering increase we've seen, but this for you started with a personal story.

Alex Skaggs (1:54)

It did, so like many people, we moved upstate recently and we had to buy a car.

And so when we went to go buy this car, like the whole process was going really smoothly until it was time to buy auto insurance. Now, neither of us had bought auto insurance before and we end up getting this price that's like super, super high. I mean, it was like a really big upfront payment, really big monthly payments.

And we realized that was kind of a go away price. Like these people did not want to cover us. So we ended up having to sort of like take a couple of days, leave the car on the lot and go find our own auto insurance, not through the dealer. It was wild. So we were sitting there thinking like, we don't have car accidents, we don't have points on our license. Like, what is this about? And then I looked at the data and it turns out the CPI for car insurance is just risen astronomically, it seems like.

Ethan Wu (2:53)

Yeah, and it's not the only kind of insurance that's been going up recently. People have been talking a lot about, state farms not covering, home insurance in California for wildfire, climate related reasons. But that's a separate story.

This story, I think you broke it down into three main reasons, labor, litigation and Lambos. And we'll get to the Lambos, but let's start with labor. This is one that'll be familiar to anyone that's followed inflation.

Alex Skaggs (3:14)

Yeah, so basically it's costing a lot more to repair cars.

You know, the cost of labor for car repairs is going up. It's also taking longer. One of the interesting things here is that there aren't more car accidents. So everyone, and actually my initial thought was like, oh, people must just be crashing their cars more because I remember seeing all that data about everyone driving terribly in 2020

Ethan Wu (3:39)

They're just more unhinged after COVID.

Alex Skaggs (3:40)

Yeah, I guess so.

But actually compared to 2021 and 2020, the number of car wrecks hasn't gone up, but the severity has gone up. And the severity just means the cost of repair and the cost of damages. So like if you hit someone else, the amount you have to pay as your damages and also to repair their car. So part of that again is the labor costs. Like it's the guys actually doing the fixing.

Ethan Wu (4:06)

So that's labor, input costs, wages. It's more expensive to repair a car. I think that's straightforward. It's a pretty common inflation story.

But then there's litigation. And this was a little bit more specific to car insurance, as I understand.

Alex Skaggs (4:19)

Yeah, this was a really interesting aspect of it. It's not that there are actually more car accidents happening. It's that the car accidents happening are getting higher insurance payouts. And part of the reason for this, at least in the first quarter, was related to this Florida law. Basically, they passed a law that could limit the amount of damages people make in these kinds of lawsuits over insurance and injuries and stuff. And so lawyers raced into court to get their settlements, get everything sorted out before that new law went into effect.