Auto insurance costs hold steady; industry cites safety, less accidents as the cause

The cost of auto insurance is expected to rise by just 0.5 percent in 2006, the smallest increase in six years, reports the Insurance Information Institute.

A declining number of auto accidents, safer cars and fraud-fighting efforts are some forces contributing to the cost slowdown. However, rising medical care and vehicle repairs continue to put upward pressure on rates, along with hurricane-related claims, the industry group noted.

The average cost for auto insurance nationwide for 2006 is estimated at $867 — an increase of just $4 per vehicle from last year, according to the I.I.I., despite record vehicle-related losses arising from the 2005 hurricane season. The projected increase represents a continued slowdown from 2005 when auto insurance costs rose by 2.5 percent.

“The cost of auto insurance is increasing by about one-sixth the rate of inflation and little more than a single gallon of gasoline,” said Robert Hartwig, senior vice president and chief economist of the I.I.I.

Hartwig cited the declining number of auto accidents, safer cars, new auto theft technology, fraud-fighting efforts and graduated licensing laws for teen drivers as additional key factors contributing to the cost slowdown.

However, he observed that rising costs for medical care and vehicle repairs as well as defense costs and jury awards remain a problem, according to I.I.I.’s analysis.

Restrictions on the use of credit-based insurance scores in several states are also a cost threat to millions of drivers, the I.I.I. said.

Katrina and the auto market
Record catastrophe losses associated with Hurricanes Katrina, Rita, Wilma, Dennis and Ophelia (the five storms that hit the Southeast in 2005) and predictions by leading meteorologists of more of the same for the next 15 to 20 years are putting pressure on the cost of auto insurance in some parts of the country.

Insurers received nearly 674,000 claims for vehicles that were damaged or destroyed by last year’s storms. Those claims occurred across a wide swath of southern states and cost insurers some $3.2 billion, said Hartwig.

Florida, Louisiana and Missis-sippi saw the most claims, but large numbers of claims were also filed in Texas, Alabama, Georgia and North Carolina. Even the landlocked states of Arkansas and Tennessee reported significant numbers of claims despite being located hundreds of miles from where the storms made landfall.

Claim severity rises
“Unfortunately, while drivers today are filing fewer claims, those that are filed cost more,” Hartwig said. “It costs more to repair cars, particularly following accidents involving sport utility vehicles.”

This year insurers will pay between $15 billion and $20 billion in medical claims, the I.I.I. reported. Higher costs for hospitalization and pharmaceuticals, and state regulations that encourage abuse of medical treatments and associated legal costs are also to blame.

“Collectively, these high costs in some states more than offset the decline in accident frequency, pushing overall rates upward,” Hartwig observed.

Cost drivers
Medical costs are an important factor in the auto insurance market. More than one in four auto accidents resulted in injury claims in 2003, according to the Insurance Research Council.

Higher jury awards in vehicular liability cases and auto theft are also significant factors that continue to put additional upward pressure on auto insurance rates.

“About 60 percent of auto premiums paid in 2005 — almost $60 billion — was for liability coverage,” said Hartwig. As we look at 2006 and into 2007, we see this trend continuing.”

And according to the FBI, an automobile is stolen every 26 seconds in the United States.