The Economic Reasons Behind Rising Insurance Rates—And Why They Might Be Leveling Off

Our 2019 State of Insurance Report showed that car insurance rates are at an all-time high. The average American now pays $1,470 per year for coverage. Rates are up for the fifth year in a row, and the average payment is now 23% higher than when we first began tracking the number in 2011.

You’ll hear a variety of reasons why your personal premiums keep rising, from your driving history to your credit score. And everyone understands some of the far-reaching reasons, such as more drivers on the road, distracted driving all around us, and the impact of natural disasters.

But there also are bigger economic factors at work behind the scenes that have driven rates up in recent years. And those same factors point to the possibility of fewer rate hikes in the future.

Without diving into a crash course in corporate finance, there is one number that you can look at to gauge how well an insurance company is doing. It’s called the combined ratio, and it essentially compares how much money a company pays out in claims (along with the general costs of doing business) with how much it brings in via premium payments.

The combined ratio is typically expressed as a percentage. Lower than 100 means that the business is going well; more than 100 is a signal that things aren’t so rosy. Until recently, it wasn’t uncommon for many insurance companies to be over 100 in their combined ratio. Lots of claims meant big losses, which in turn drove rates higher.

Now, however, most insurance companies’ finances have stabilized, which means that they can invest more into their customers, especially into acquiring new ones on the marketing side. (This is one reason you see car insurance ads nearly every time your favorite show goes to a commercial.) But it also means they don’t have to continue to increase their rates at such a large scale to keep up with the changing market.

We’re already seeing some evidence of this shift. State Farm lowered rates in Texas and Louisiana (even after hurricanes hit those states) because the company invested in technology to optimize underwriting, meaning it can return some of the premium to consumers in the form of lower rates.

And it’s not only the big players who are making moves like this to save their customers money. Clearcover, a Chicago-based startup, only markets to customers during moments (on sites like The Zebra) when the customer is in the market for car insurance, instead of on billboards and commercials like you see for other insurance providers.

Along with improving finances, recent advances in technology have also had an effect on rates. New companies like Root and Metromile are moving into markets with a business model based on specific data around how someone drives or how many miles they travel, rather than setting rates based on a complex set of statistical risk factors that include, among other details, your education level, job, gender, and whether you own a home. The additional attention (and investment) directed at these up-and-coming companies will push the more established carriers to think about a more modern approach to setting rates: one that focuses less on group demographics and more on how you actually drive your car.

Those are two large contributing factors for why we see rates leveling off, and perhaps even going down, in the future. It won’t happen overnight. The very nature of the insurance business moves slowly. It takes years for companies to verify whether their financial changes make a difference in profits, and they may base their decisions on events that happened years ago. Plus, companies work through each state’s department of insurance to set rates, which makes for a naturally slow process.

It’s easy for us all to grumble when we make that premium payment, so sometimes we need to take a quick peek behind the scenes to understand where that money is going. We want insurance companies to be there for us when we need them, and our premiums make sure they have enough cash to do just that.