As rates continue to rise, how much is enough?
With clients paying more to renew their existing auto insurance,
how can producers induce them to acquire even higher limits
needed to keep pace with the very factors driving up the cost of coverage?
By Joseph S. Harrington, CPCU
Personal lines insurance agents and brokers will be chagrined but not surprised to learn that motor vehicle insurance was the leading source of consumer price inflation in 2023, and it wasn’t even close. In a year when the federal Consumer Price Index slowed to 3.4%, and when the cost of fuel and vehicles levelled off or fell, the cost of motor vehicle insurance rose 20.3%. Only very minor categories of expenditure even approached that level of increase.
Indeed, with the weightings given each category of expenditure, the next highest level of significant price increase was for motor vehicle repair, 10.3%, itself a factor in rising cost of auto insurance.
It comes as no surprise, then, that consumer research firm J.D. Power reported elevated levels of consumers shopping for auto insurance and switching their carriers through the first three quarters of 2023. The trend seemed to abate in the fourth quarter, however, with J.D. Power concluding that consumers have begun to show “resignation to higher premiums.”
If that proves to be the case, the public can breathe a sigh of relief, as an uptick in the reported number of uninsured motorists has some fearing that the rising cost of auto insurance will induce many to forgo coverage altogether. That would be ill-advised but understandable at a time when households are still adjusting to higher prices for most products and services.
Higher limits needed?
Personal lines agents and brokers have another challenge, however. With clients paying more to renew their existing auto insurance, how can producers induce them to acquire even higher limits needed to keep pace with the very factors driving up the cost of coverage?
Producers and carriers are already under critical scrutiny for the fact that many homeowners were not adequately insured to replace dwellings destroyed during a natural disaster. Homeowners learned the hard way that “replacement cost” coverage did not necessarily cover the full cost to replace.
The situation could be far worse if auto liability and physical damage limits are not sufficient to cover the growing cost of advanced medical care for injured persons and the growing cost of repairing vehicles that incorporate advanced technological features.
The E&O exposure for not recommending higher limits would be substantial. Yet, at the same time, no agent wants to appear unsympathetic to a household seeking to balance its budget in trying times.
No guidelines
Conscientious producers seeking to provide guidance will have to look to their carriers because they will get no help from industry sources.
The minimum limits established by state financial responsibility laws are woefully inadequate for covering almost any accident involving a serious injury or total loss to a vehicle. The very existence of those minimums may send the wrong signal to the average household, which typically needs far more coverage than what is suggested by the statutory minimums.
Moreover, those minimum limits have not been updated to reflect the latest trends in auto liability claims. According to the Insurance Information Institute, only five states increased their minimum financial responsibility limits between 2018 and the end of 2023; four of those made only slight modifications.
Only one state, Michigan, has financial responsibility limits that approximate what most producers and carriers would consider necessary for a typical household: $250,000 per injured person, $500,000 injury aggregate, $10,000 physical damage.
Unfortunately, while there are authoritative sources of information on personal auto premium and exposures (policy-years), there is nothing comparable on the amount of insurance in force. So, we know for sure that people are paying more for auto insurance. We don’t know how much they’re getting.
Good luck getting your rate-shopping customers to maintain or increase their auto limits. If they get in a bad accident and wind up short for compensation, they’ll question whether you did enough to warn them.
The author
Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services
