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2022 Auto Insurance Trends

Auto insurance is likely to see 2022 as a year to get back to normal — hopefully. With the lockdowns of 2020 in the rearview mirror, traditional rate models are again more reliable, but there are some things that will keep insurers guessing in the year to come.

From inflation to self-driving cars, there are plenty of issues still to be ironed out in the auto insurance market.

2022 Car Insurance Rate Outlook

To start, many industry observers are calling for modest, albeit consistent premium increases in most markets for 2022.

The biggest single driver of increasing rates is the cost to replace a totaled vehicle. With the recent burst of inflation in the used and new auto markets, replacing a vehicle is just more expensive. In the January inflation numbers, new car prices jumped by 12%. Used cars increased by more than 40%. This ultimately drives up auto insurance rates for coverage.

Those increases are driven by a number of things — but the largest single driver was the international shortage of semiconductors that have idled production lines, limiting the supply and promoting automakers to prioritize building their highest profit models. Supply chain bottlenecks at ports further limited dealer stock.

Fewer new vehicles means that excess demand shifted to used vehicles, driving their supplies down and their costs up.

But the problems don’t end with finished vehicles. Aftermarket auto parts as simple as filters and hoses have become scarcer because pandemic restrictions have shuttered or slowed factories across the globe.

Less supply translates to higher prices, and higher prices translate to bigger costs to insurers if they have to pay to repair or replace a vehicle after a wreck.

On top of that, nature weighed in with a disproportionate number of disasters in 2021, driving more than $105 billion in insured losses. From hurricanes, like Ida and Nicholas, to wildfire storms in the west to devastating tornado outbreaks, every insured loss led to a payout by insurers, and those payouts will inevitably lead to higher premiums.

Another premium driver was increased health care costs. Because health care costs are moving up in 2022, if someone is injured in an accident, insurers end up paying more to treat them, and again, those costs get passed along as higher premiums.

Emerging Trends in Car Insurance

Premiums aside, there are several areas within the auto insurance industry that are worth watching in the coming year.

A major trend is going to be the increased adoption of usage-based car insurance.

Usage-based insurance is a voluntary program that allows insurers to charge policyholders based on how that person actually drives.

The insurer can gather those driving behaviors by either tracking the driver through the vehicle’s onboard sensors, or through a telematics device plugged in to the vehicle’s diagnostic port, or through a smartphone app.

Usage-based insurance accounted for $19.6 billion in premiums in 2021 in the United States according to MarketsandMarkets Research.

And according to Allied Market Research, usage-based insurance is expected to grow on a 25% compounded annual rate through 2027.

The telematics data can include things ranging from the number of miles driven, the time of day the vehicle is in use, hard stops, fast acceleration, or any number of other variables that might translate into driving risk.

Not every state allows usage-based insurance, and policyholders must opt in — insurers won’t quietly snoop on you if you haven’t agreed to be monitored. But participating in these programs can net savings of 20% or more — presuming they drive safely.

Advocates of usage-based insurance say that not only do they give accurate rates based on driving risk, but they actually improve driving habits, because they can give near-instant feedback when someone is engaged in risky behavior.

Another trend in the car insurance policy coverage industry is the evolving role so-called “insuretech” firms are playing. Insuretech is a term used to describe technology firms that aim to disrupt the insurance industry. While their initial focus seemed to be on writing policies, the tradition-steeped state regulation systems prevented them from getting much of a foothold in that space.

Instead, insuretech firms have focused on a supporting role, developing tools for the traditional insurance companies to use to be more responsive and efficient.

Insuretech firms are creating back-end computer and data management systems, underwriting tools, and customer relationship management tools, among other things.

Through these new technologies, insurers can autofill applications quicker, interact with customers in a more efficient and automated way, and anticipate questions and problems even before they surface.

According to the 2022 Insurance Trends and Outlook Report by Transunion, digitization across the policy lifecycle will continue to drive insurers’ relationships with their customers.

The Transunion report also points to a move toward non-traditional data sources. Already some insurers are using credit scores to assess risk, but these nontraditional sources could include things like rent payments and other metrics that could more accurately assess policyholder risks.

Commercial Auto Insurance Trends

Unfortunately for businesses, according to the Insurance Information Institute, litigation is leading to increasing commercial auto insurance in the coming years.  

According to their Social Inflation and Loss Development paper, jury awards for commercial auto claims can often exceed $10 million. Those awards have been growing each year, and higher payouts translate into higher premiums.

These premium increases are likely to be felt in both commercial auto policies, and in business owner’s policies that include an auto component.

Business auto insurance is also a concern for so-called gig work. These are ride share drivers, delivery drivers, and the like.

If a gig worker is using a private vehicle to make money, a traditional private insurance policy won’t cut it. Gig workers need to ensure they pay for an expanded commercial policy or a rider on their personal policy to ensure they are protected.  

The Transunion study showed a small glimmer of hope, suggesting that automation and technological tools may lead the digital transformation into the commercial space, leading to automation and less human touch, which could moderate premiums in the long run.

Electric Vehicles

Most auto insurers don’t discriminate against drivetrains — meaning that an electric vehicle should be treated the same as an internal combustion engine when it comes to insurance premiums.

That said, there are some features inherent to electric vehicles that are still driving costs to insure them higher than their internal combustion brethren.

First, EVs tend to cost more to purchase than their gas-guzzling counterparts, largely due to the relatively high cost for batteries. Higher costs mean they are more expensive to replace in the case of a loss, and that translates to higher premiums.

Parts and repairs are also a problem. Because there are fewer electric vehicles on the road, the aftermarket parts and mechanics don’t have as much incentive to specialize in EVs. With fewer options when it comes time to repair, that also translates to higher costs.

For its part, Tesla is trying to bring down costs to insure its market-leading EV. Tesla has partnered with an insurance carrier to offer branded insurance in some markets for Tesla drivers.

Tesla uses telematics data from its vehicles to give each drier a unique driving score and prices their policies accordingly. In the past, they have also aggregated and anonymized the telematics data to show that Teslas, as a whole, are less risky to insure.

The idea here is that the standard safety features, such as dynamic stability control, advanced sensors, and crash avoidance tech just makes them safer vehicles, which should lead to fewer losses.

Autonomous Driving Car Insurance

It won’t be long before commercially available driverless vehicles are on the road, and many states are writing laws accordingly. While some states are shunning driverless vehicles, others are embracing them wholeheartedly, but with some coverage caveats.

For example, some states allow for driverless vehicles, but they require the owner to take out extremely large insurance policies on them — in some cases as much as 2.5 times the liability limits required for human drivers. Others set the minimum liability coverages in the millions.

The open question when it comes to autonomous vehicles is that if they get into a wreck, who should be liable. Since the driver wasn’t in control, could they meet the legal threshold for “fault?” Would the manufacturer be at fault? The programmer?

There is still a little time to work out the legal framework.

Theoretically, autonomous vehicles could result in fewer accidents per mile than a human driver — after all, close to 90% of all accidents are due to the operator, rather than due to the vehicle.

That said, horror stories of advanced vehicles slamming on their brakes for no apparent reason in the middle of highway traffic are still keeping regulators up at night.

For now, the autonomous features available in today’s new cars are meant to be “driver’s assistance.” These are sensors that steer back to the center of the lane, or that use radar to track the speed of the vehicles in front and match accordingly. Because they are there to help the human, rather than to take control, the human drivers — and their insurance — are the ones on the hook for a wreck.

Strategies for Saving in 2022

With costs going up, the inevitable conversation moves to savings. The first piece of advice in this arena is to ensure the policyholder is buying the proper coverage. Being underinsured is obviously a problem, because drivers could be left holding the financial bag if something goes wrong.

But, by the same token, over insuring is also a problem. Carrying comprehensive and collision coverage on a 20-year-old vehicle doesn’t make sense if the deductible costs more than the vehicle is worth, for example.

Some people can get by with lower policy limits for things like liability and uninsured motorists, while people with a lot of assets to protect should opt for higher limits in these areas.

Once a customer figures out what the ideal policy should have, it is then time to shop around. Marketplaces, such as InsuranceQuotes.com allow policyholders to compare rates from many different carriers all in one place.

Telematics and usage-based policies available through most carriers are excellent ways to reward safe drivers with lower premiums.

Asking the agent for all available discounts is also essential — things like policy bundles and good student discounts go a long way.

But, whatever they do, policyholders should only cancel their policy as an absolute last resort. And then, if they own a vehicle, they must never drive uninsured in a state that requires insurance — and most do.

Canceling a policy will lead to much higher premiums when a policy is inevitably reinstated because of that coverage gap.

And driving without insurance can get the driver into serious legal hot water.

Conclusion

Insurance rates are heavily state dependent. Each state has an insurance regulator that approves rate increases, so local changes make a huge difference. For example, Michigan announced in 2021 that policyholders would receive $400 refunds because of a surplus in its Michigan Catastrophic Claims Association fund.

That refund comes on the heels of Michigan’s no fault auto insurance law changes, which changed personal injury protection rules and attendant care rules.

Washington state is working to ban credit score in premiums there, which could also have an effect on rates down the road. And Louisiana changed a law that limits the dollar amount required to take a case to court in hopes of limiting insurance settlement costs and ultimately — they hope — drive down rates.

Looking way ahead, regulations on the vehicles themselves could result in claims reductions. One example is the proposed federal regulation that all vehicles come equipped with DUI sensors by 2026.

Regardless of what the future holds, insurers, and policyholders, hope 2022 could represent a bit of a return to predictable normality following several years of pandemic-related uncertainty.

Michael Giusti, MBA, is a senior writer and analyst for InsuranceQuotes

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