Affordability is an issue car dealers have been battling daily over the past couple of years as retail prices for used and new vehicles soared to unprecedented highs.
This year, though, those prices have been falling steadily while, as noted by Cox Automotive’s analysts in their 2024 midyear review, consumers’ incomes are rising. And yet sales growth has been slow.
Turns out it’s not just about the price of the car.
Inflation hit a 40-year high in 2022, driving household costs such as food and housing through the roof. And while inflation has slowed, those prices aren’t going down.
Perhaps the biggest factor from an automotive standpoint is the cost of auto insurance, which has risen almost 30% over the past two years, according to Mike Burgiss, Chief Marketing Officer of auto insurance marketplace Polly.
“That is significant,” he said. “It’s more than inflation, higher than the increase in the price of cars.”
The percentages bear that out. Cox Automotive data shows the average new car transaction price in June 2024 was just 1% higher than two years previously, while used car list prices were actually lower in 2022.
Average auto insurance costs are hard to quantify since there are so many variables involved — coverage level, location, driving record, number of vehicles owned, insurance history, renting or owning a home, etc. — but for drivers with one car who have had insurance previously, Burgiss said, premiums have risen from $1,644 per year in 2022 to $1,874 in ‘23 to $2,134 this year.
According Bankrate’s True Cost of Car Insurance report, full coverage auto insurance costs now account for 3.41% of an average household’s income. And that substantial chunk, Cox Automotive chief economist Jonathan Smoke said during a June media conference call, has turned insurance into “a big problem” for car sales.
“On average, households spend 17% of their income on transportation,” he explained. “That’s got to cover insurance, vehicles, fuel and other smaller categories. Historically, insurance has been around 2%. So, if suddenly insurance now takes 3% of your income, that 1% has to come from somewhere. And I’m pretty sure it’s not coming from food and housing.
“So, it puts pressure on affordability. And that’s another reason why we see higher price sensitivity for vehicles, even though technical measures of affordability are improving because prices are coming down and incomes are going up. It doesn’t mean consumers actually are able to transact.”
And it’s not just buying a car that has been affected by high insurance costs. Keeping one has become more difficult, too. Burgiss said Polly’s data shows insurance currently represents 17% of the typical cost of vehicle ownership, up from 12% two years ago. And as with car shoppers, many car owners are deciding that’s just not doable.
Defaults and repossessions are on the rise. Cox Automotive’s Jeremy Robb said current auto loan data indicated defaults are up about 11% this year, and Manheim reported repo units at its auctions for the first half of the year were up 23% from 2023 and 14% from the pre-pandemic level of 2019.
And part of that, Smoke said, is being driven by the high cost of insurance.
“I can tell you anecdotally,” Smoke said, “this spring I’ve heard from multiple lenders saying they’re having an increase in what they refer to as voluntary repossessions, where consumers are turning in the keys not because they can’t afford the payment anymore, but because they can’t afford the insurance on the vehicle that they recently purchased and financed.
“And we haven’t yet reached the peak in auto insurance.”
Burgiss said the rapid rise in car insurance costs is the result of “a perfect storm” of factors.
“It’s not just one or two forces impacting rates,” he said. “It’s the compounding effect of multiple trends — higher repair costs, more frequent and costly claims, rising interest rates and ongoing inflationary pressure.”
The recent 2024 U.S Auto Insurance Trends Report from LexisNexis Risk Solutions detailed some of those trends, noting insurance providers found themselves struggling with profitability as claims have become more frequent and costly, thanks in large part to the increased complexity of today’s technology-laden vehicles.
The report found claim severity has been steadily rising since 2020, with bodily injury claims up 20% and material damage up 47% in that span. In addition, 27% of collision claims were deemed total losses in 2022 and ‘23, up 29% from 2020.
The rise of electric vehicles has also played a part in the rise in insurance costs due to higher rates of claim frequency (17%) and severity (34%) than gas-powered cars, according to the LexisNexis report.
“Their insurance premiums tend to be very high,” Cox’s Smoke said, “and they often are totaled when they get into an accident, at a higher rate than many other vehicles because of potential damage to the battery and … the lack of repairability.”
Those costs, the report said, helped raise insurers’ combined loss ratio to 112% in 2022, which the 2023 rate increases brought down to 105%.
“Also keep in mind the insurance industry is regulated and there can be a delay of 12 months for rate increases to take effect,” Burgiss said. “To maintain rate adequacy, companies look both at what’s happening today and what they expect to happen far in the future. So, some of what we’re seeing with rate increases today is a lagging indicator from the past two tumultuous years.”
While Burgiss said Polly sees premiums “starting to flatten out,” as “increases are slowing down and, in some cases, have leveled out,” he said there is still considerable sticker shock for car owners who are renewing are seeing the higher prices.
The result of that, he said, is increased shopping for better insurance rates. The LexisNexis report bears that out, showing 41% of consumers who had auto insurance at the end of 2023 shopped at least once for a new policy, unusual in what is traditionally a very stable market. Overall, the report said, car insurance shopping was up 4.7% last year and new policies rose 6.2% as a result of consumers changing insurance companies.
And that, Burgiss said, leads to an opportunity for car dealers to generate recurring income by incorporating insurance sales into the car-buying process.
“What it puts in the consumer’s mind is, ‘I really need to pay attention to insurance when I’m going to buy my car,’” he said. “And what do dealers do? They help people buy cars. So, let’s put those two ideas together and do it in a way that the dealer can profit and customers get more help than they’re getting today.
“What dealers think today is insurance is a step in the process that they have to do to get a car sold. But some of the smartest dealers in the country have already reframed insurance as an income opportunity for themselves. The dealers who are ahead of this trend and are on this trend, are figuring out that insurance is an income opportunity.”
Polly’s 2024 Embedded Auto Insurance Study showed the concept of purchasing insurance along as part of the purchase of a car has traction, especially with car buyers 45 and younger.
The survey of more than 1,000 consumers who had purchased a car in the previous 12 months, found 63% said they believe it makes sense for insurance to be a part of the vehicle-buying process, including 79% of millennial and Gen Z respondents. In addition, 60% of all consumers and 81% of those from the younger generations said they want the option to purchase auto insurance while buying a vehicle at the dealership.
“If you’re thinking about the car purchase process, what’s a typical behavior? ‘I’m going to buy a new car and I’m going to put my new car on my old policy,’ ” Burgiss said. “Well, nowadays, there’s more shopping. So, Mr. or Ms. Customer, you’re buying a new car, let’s see what the best options are for you. Because it’s a good time to have a financial mini-health check and see what’s out there. You never know, adding your new car to your old policy might not be the best option for you from an expense standpoint.
“One of the headlines is young car buyers are asking for dealers to help them with their insurance options. And the reality of how many dealerships are really doing anything to help is, it’s very small. So there’s a big opportunity there from a customer service aspect.”
Article Originally on Auto Remarketing
Author: Andrew Friedlander, Associate Editor