Inflation hit a multi-decade high of 5.7% this February. Industry observers warn this could go even higher before it goes lower, and the auto insurance industry is not immune to it.
How long will it be before drivers feel the effects on their policy premiums?
Consumers won’t see their rates change until their auto policy is up for renewal, says Tanisha Kishan, insurance expert at Ratesdotca.“Inflation will impact auto insurance rates just like it does every other industry. But I think it’s just a matter of when consumers, at the end of the day, will see that rate change.”
Typically, one year policies won’t be changed mid-term, Kishan says. Inflation’s impact, therefore, will be “more just a delayed reaction for the end consumer rather than anything else.”
Auto insurance rates are partly based on insurers’ claims costs. And inflation will drive up claims costs.
For example, labour shortages in the auto repair industry and supply chain issues are also affected by inflation, Kishan says. High demand and low supply often means pricing goes up, particularly for auto service and parts.
“We have seen the overall cost of claims go up,” Kishan says. “The cost to repair a car — it’s harder to find parts, and the parts in itself could be more expensive. There’s a labor shortage, so all of those increase the price overall.”
“You’ve got inflation being pretty high, both in the U.S. and Canada, and that’s driving higher auto damage repair costs,” adds Rosemarie Mirabella, director at AM Best. “That’s a negative in terms of financial trends.”
Inflation may also impact claims settlements — U.S. insurers are already seeing these effects.
“The inflationary impact on claim settlements — we have seen some of those Stateside — where a settlement amount is astronomical,” says Gordon McLean, senior financial analyst at AM Best. “Nuclear settlements is what we’re calling them. Some of these things do take time to work themselves through the court systems.”
Is there a potential for that to transfer into the Canadian market?
“[That’s] something that we’re continuing to watch for the Canadian market,” McLean says.
As provinces begin to lift their pandemic restrictions, Ratesdotca reports that consumer driving habits will be a large factor that affects auto insurance premiums.
Consumers have seen auto insurance premiums decrease when fewer people were driving during the height of the pandemic. However, as restrictions lift and Canadians begin driving more in 2022, there will likely be a corresponding rise in premiums in 2023, Ratesdotca reports.
But, while many predict that consumer driving will increase, McLean says rising prices may discourage drivers from hitting the roads.
Alongside supply chain issues, McLean says, “the price of gas, and the impact of the inflationary environment on slower car repairs, could potentially have an offsetting effect to the number of miles driven as we come out of the COVID environment.”