Are Insurance Premium Spikes a Ripoff?

by Chasidy Rae Sisk

If it seems like your auto insurance premiums increased more than ever last year, you aren’t too far off base.

Nationally, premiums rose by approximately 20 percent in 2023. That means insurance coverage costs rose six times faster than the Consumer Price Index (CPI) inflation rate of 3.4 percent, outpacing nearly every other common consumer cost and reflecting the largest annual increase since 1976. And those rate spikes are anticipated to continue in 2024 with predictions indicating an increase of 12.6 percent nationwide…and New Jersey drivers could see one of the highest increases of up to 34 percent!

Insurance premium prices rise for a number of “reasons,” and a simple internet search will reveal a long list of justifications for the current increases. Most commonly, insurers claim that the costs associated with driving have risen – increasing repair costs associated with parts shortages, advanced technology and so forth necessitate the decision to charge more. Riskier driving leading to a greater number of accidents is often blamed, and the rising prevalence of natural disasters, such as flooding and hailstorms, also contributes to claims that insurers must pay, forcing premium increases. They also blame increasing operational costs, additional rental car days caused by delayed repairs and more. Pointing the finger at inflation in general would make sense if auto insurance premiums were not increasing exponentially faster than the CPI which is expected to drop close to two percent this year. 

Insurers’ assertions are certainly interesting, given many shops’ and consumers’ experiences with submitting claims which are often denied partially or even rejected completely. So, are these premium spikes truly justified? Or is it all one big ripoff?

Well, it’s obvious that advancing technology has led to higher severity in some respects, but shops can attest to the prevalence of insurers refusing to pay for certain processes and procedures. Along the same lines, risky driving has largely been mitigated by these same technological advances which include an ever-increasing prevalence of safety systems being installed in modern vehicles. In fact, the Insurance Information Institute (III) claims that auto insurers paid out 112 percent of premium dollars collected in claims in 2022. 

Yet, there never seems to be such a deficit reflected in insurance company’s budgets…just take a look at what several major insurers paid their CEOs! 

The Consumer Federation of America (CFA) released a statement in October 2023 where it noted that the 10 largest auto and home insurers paid a quarter billion dollars to its CEOs over the previous two years. State Farm’s Michael L. Tipsord received the highest compensation in both 2021 and 2022, collecting more than $24 million each year (mostly in the form of bonuses since his base salary in 2022 was “just” $2.4 million). At the same time, the not-so-good neighbor increased auto premium rates in Illinois four times, while Louisiana customers saw an increase of 17 percent. Premiums increased by nearly 24 percent in 2023 over the previous year, so who knows how much Tipsord made last year?

“CEOs are living high on the hog while increasing insurance premiums for people living paycheck to paycheck,” said Michael DeLong, CFA’s Research and Advocacy Associate, in the consumer advocacy agency’s statement. “Insurers are telling regulators that ordinary consumers have to pay much more for auto and home insurance because the companies are struggling with inflation and climate change, but they are quietly handing CEOs gigantic bonuses. Drivers are required to buy auto insurance and homeowners have to buy coverage to satisfy their loan requirements, so there needs to be more scrutiny of the rate hikes companies are demanding and the huge CEO paydays that are funded with customer premiums.”

CFA has also called insurers out on morally dubious practices such as using credit scores to charge good drivers a higher premium if they have a poor or fair credit rating, a form of price discrimination that “disproportionately harms low-income consumers and people of color,” according to their 2023 report, “The One Hundred Percent Penalty.”

An analysis of New Jersey averages revealed that a 35-year-old with excellent credit pays an average premium of $660 annually, while someone with fair credit pays $1,087. Meanwhile, the average premium spikes to $1,663 if that individual has poor credit; however, those statewide averages actually show a much fairer distribution than can be seen based on specific ZIP codes, as seen in Figure 8 of CFA’s report:

As if that wasn’t unfair enough, some consumers are forking out a lot more cash for their premiums based on a practice called price optimization whereby insurers use algorithms based on all sorts of personal data – NOT including driving habits or other commonly accepted rate factors – to determine the highest rate that a consumer will tolerate. This data utilizes AI to evaluate everything from one’s shopping habits to their dietary habits, yet it seems highly unlikely that insurance customers have given permission for their lives to be analyzed in such extreme detail. 

In fact, a 2022 home and auto technology survey conducted by Policygenius indicated “68 percent of Americans would not install an app that collects driving behavior or location data for any insurance discount amount.”

Insurer practices, such as but not limited to those mentioned above, have led to a lot of distrust among consumers with many questioning carriers’ decisions to reject claims in part or in full. And although the purpose of insurance is to help people feel safe, insurers are one of the least trusted industries. 

According to the 2023 Financial Services Reputation Report published by Caliber, a perception management organization, nearly a third of polled Americans indicated they were somewhat likely or very likely to switch their insurance provider in the next 12 months. “The risk of churn is mainly driven by high prices but also a sense that companies are not acting in their customers’ best interests,” the report reads.

The most recent Fairer Finance Trust in Insurance Index shows 52 percent of unhappy insurance customers listed cost as the source of their discontent, while 25 percent was dissatisfied with the claims process. 

Digging into the data surrounding insurance is completely convoluted, but it’s certainly important for all of us to have a better grasp on the nature of the industry to protect our own interests. As Jathan Sadowski recently wrote in Business Insider, “Private insurers are not unique in succumbing to the financial imperatives of profit growth, but they are uniquely positioned to prey on our insecurities, exploit our desire for protection and abandon us in our greatest times of need. And insurers hide behind the industry’s reputation of being too boring to care about, too esoteric to understand, and too technical to challenge. But as insurance becomes more necessary and less accessible in the face of mounting risks from the climate crisis, we need to pay more critical attention to how insurers operate and whose best interests they really serve.

“The crisis of insurance accessibility and rising costs cannot be fixed without real accountability and oversight of the industry. The stuff of insurance is far too important to be left to the insurance industry.”

Want more? Check out the February 2024 issue of New Jersey Automotive!