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Why Better Technology Can Still Mean Higher Auto Insurance Rates

Thanks to advances in technology, cars today are the safest they have ever been. Sensors which can prevent you getting too close to another vehicle, or straying out of your lane, other safety features such as airbags, and even structural design enhancements such as crumple zones, have all led to drivers and passengers being safer in the event of a collision.  So why are auto insurance rates going up?

At first glance, drivers also seem to be practicing safer driving habits, with fewer accidents involving drowsiness, or lack of seat belt use, being reported.

Yet, despite these positive developments, auto insurance rates across the country are skyrocketing, and Tennessee is no exception. Automobile insurance, once a highly profitable segment for insurance companies, has recently become much less so.

Illinois-based State Farm Mutual Automobile Insurance Co., the country’s largest auto and home insurer, disclosed a few months ago that its profits for 2016 plummeted to $400 million, from $6.2 billion the previous year, due to auto accident claims.

The Travelers Companies Inc. also reported earlier this year that the number of car insurance claims for 2016 reached nearly 840,000, an 11 percent increase from the prior year.

In fact, between 2014 and 2016, the frequency of collision claims across the nation rose by 2.6 percent, after years of decreases, and the severity, or cost, associated with these claims increased by 8 percent, according to the Insurance Information Institute.

A decade ago, companies spent 98 cents on claims and medical costs for every $1 in premiums; in 2015, the most recent year for which the data are complete, the industry spent $1.05 for every $1 they took in, according to the insurance research group.

If you are spending $1.05 for every $1 you earn, you don’t need to be a genius at arithmetic to understand that you can’t go on that way forever. If you are in business to earn a profit, and you aren’t doing so, the shareholders to whom you answer become restless.

Typically, there are only two avenues available when profitability is down: cut costs, and/or raise prices. Larger insurance companies such as State Farm and Farmers are in fact implementing cost-cutting measures, such as reduction in personnel. But in a mature business or company, only so much cost-cutting can be done before systems and service quality begin to erode.  Enter the price hike – insurance rates going up!

The national average for automobile insurance rates averaged $926 in 2016, a 14% increase since 2012.

Even if you are accident free, which for a long time protected against auto insurance rates rising, chances are you have seen an increase in your auto policy premium. We field several calls a month from long-term customers, understandably upset that their premiums have increased, even though they have a stellar driving record.

The more sophisticated of these clients also understand that the value of the asset that they are driving also decreases every day, due to the relatively rapid rate of depreciation that automobiles typically carry.

“So why the heck, (they ask,) in the face of my accident free driving history, and the declining value of my automobile, is it costing me so much MORE for car insurance – why are my auto insurance rates going up??”

The Four Big Reasons

 

Insurers lay the blame for auto insurance increases squarely on the shoulders of technological advancement, especially with hand-held devices such as mobile phones. Yes, the same amazing technology that has made cars much safer has ironically also made drivers much less so.

But as is so often the case with any issue, one single factor alone doesn’t explain the entire problem. And when it comes to rising auto insurance rates, it seems that there has been a perfect storm of four distinct elements, coming together at the same time, which is responsible for driving insurance premiums not only higher, but in many places through the roof.

These are the four main contributors to today’s current levels of auto insurance rates:

1) An Improved Economy

As the economy has improved, and gas prices decreased, many more drivers and vehicles are on the road, both for work and for discretionary travel. This increased density of traffic not only means there is more risk for accidents to occur, but also literally less space and time to react.

So while technology has likely made your vehicle safer in the event of a collision, the risk of that event actually happening has increased

2) Aggressive Fight for Market Share

As the numbers of drivers and vehicles began to swing upwards once more, and automobile insurance, in particular, began to be viewed more and more as a commodity, insurers began a fierce battle for customers by offering lower rates.

This price war has resulted in them collecting less in premiums. The long period of low interest rates has not helped matters, as it has lowered the returns on the safer types of investments that insurers use to cushion business ups and downs.

3) Increased Frequency and Severity of Claims

Another element in the mix is the increasing cost of repairing or replacing vehicles, and their parts. Again, ironically, the increasing amount of technology packed into cars these days, such as sensors that monitor and measure nearly every aspect of performance, makes newer vehicles much more expensive to repair than they were only a few years ago. According to Boston-based Liberty Mutual, Just fixing a damaged bumper in 2016 cost $1,705 more than it did two years earlier,

Even a simple windshield replacement, that used to cost about $350 (and would not have resulted in a claim if you carried a $500 deductible), now involves higher-quality glass, with embedded sensors that connect to the car’s on-board computer system, and costs twice as much.

Manufacturers are also bringing the sophisticated safety features that once came only in luxury lines, such as systems that keep motorists from veering into another lane, into everyday models. But those new technologies have not become sufficiently widely adopted to improve overall traffic safety.

As of 2016, the last year for which data were available, the cost of replacement parts was 2.3x more than for the same model 2014 car. The cost of labor has also risen, by almost 18%.  The latter increase is due to more skilled labor being needed to work on onboard computer systems, as well as the softer metals, such as aluminum, now being used instead of steel in many automobile structural components.

4) Distracted Driving

And then there is the 800 lb gorilla. Basically, as phones have become “smarter,” it appears that our usage of them has become less so, with unintended and sometimes deadly consequences.

The National Highway Traffic Safety Administration has stated that in 2015 (the last year for which data are available), there were 3,477 people killed, and approximately 391,000 people injured in accidents in which distracted driving was implicated.

These fatalities attributed to distracted driving included texting, fiddling with GPS, and even eating, and the numbers were an increase of 8.8 percent in 2015 over the prior year.

In 2015, the overall number of motor vehicle fatalities in the United States also increased 7.2 percent, the largest jump in half a century. The largest contributor to this increase? That very same 8.8% rise in distraction-related fatalities.

This issue is especially troublesome because of the greater risk to young people. In the January 2, 2014, issue of the New England Journal of Medicine, a team of researchers from the NIH, and the Virginia Tech Transportation Institute reported results from a complex study involving in-car voluntary video surveillance.

The study found that newly licensed teen drivers, when engaging in a number of tasks, were at significantly higher risk for accidents or near misses than their peers who were not so engaged.

Novice teen drivers were 8 times more likely to crash or have a near miss when dialing a phone; 7-8 times more likely when reaching for a phone or other object; almost 4 times more likely when texting; and 3 times more likely when eating.

In the same study, experienced adults were “only” twice as likely to crash or have a near miss when dialing a cell phone. However, they didn’t have an increased risk while engaging in other tasks secondary to driving. The act of talking on a cell phone didn’t itself increase risk among either adult or teenage drivers. However, a cell phone conversation requires you to reach for the phone, to answer or to dial.

So just how frequently is such behavior occurring in the real world?  Data on this subject are difficult to gather, because many drivers, for obvious reasons, are not always forthcoming about their distracted driving habits. Even so, a 2015 survey conducted by State Farm Mutual Insurance Company showed that more than 1/3 of drivers admitted to texting while driving, while 29% stated they surfed the Internet. 20% said they shot pictures while behind the wheel, and 10% said they shot video.

TrueMotion (a Boston company that makes an app to track how much drivers use their phones) recently reported that, in an analysis of 18,000 of their users, drivers spent 20 percent of every trip on a call, holding their phone, or texting and scrolling through social media.

It’s clear that drivers are spending plenty of time on their mobile devices while behind the wheel.

From an insurance standpoint, insurance companies who have been slashing prices to gain market share, in a low interest rate environment that reduces investment income, are not generating the revenues they used to enjoy from the automobile segment of the market. In addition, they are now facing stresses on the expense side as well, due to more frequent accidents, and more costly repairs.

ALL drivers now have to contend with a larger number of vehicles on the road, creating traffic densities that take away reaction time and space. Add a significant component of distractedness to the mix, and you arguably have a downright dangerous situation.

The Bottom Line – Insurance Rates Are Going Up:

Given the perfect storm we’ve been describing, many insurance companies, to use the correct financial terminology, have taken a whack. And because cost-control in the face of more frequent (fuelled by distracted driving), and more costly (fuelled by high-tech vehicles), accidents is not an option, prices have to rise.

Insurance companies must apply to the State’s Insurance Commissioner to get permission to raise rates. State regulators rely on insurers’ frequency and cost data when deciding whether to permit rate increases.

The Massachusetts Division of Insurance, which reviews rate requests to ensure they are justifiable, said it has noticed companies reporting higher property damage claims.

“I would characterize distracted driving as a big factor,” said Chris Goetcheus, a Division spokesman. “It’s resulting in more accidents out on the road.”

Auto insurers in Massachusetts have received approval from state regulators to raise their rates between 3 and 6 percent this year, with some drivers possibly facing higher increases. The insurance rate increases will probably affect all customers of those companies, industry officials said.

2017 will be the second straight year of steep increases: Rates in 2016 jumped between 6 to 9 percent, on average.

Closer to home, drivers in North Carolina haven’t seen a premium rate increase since 2009, but insurers in that state recently petitioned the State Insurance Commissioner for a 13% increase.

Which brings us to a final thought: It isn’t so much a question of IF your auto insurance company is going to increase your rates, it’s only a question of when, and by how much. Chances are, the longer they’ve tried to keep prices down, to compete for market share, the more dramatic an increase you will see.

Regardless of any such considerations, the best way for you to save your money, and possibly your life, is to not text and drive.

References:

New England Journal of Medicine

Wall St. Journal

Boston Globe

Charlotte Observer

 

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