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​Why insurance costs are rising
Woman driver and mechanic discuss auto repair cost

Repair cost increases are one factor in rising insurance costs

With a sluggish economy and stubbornly high unemployment levels, Americans overall are logging fewer miles behind the wheel than they did a few years ago. So wouldn’t it stand to reason that insurance rates should be dropping, too?

Well, no.

In 2010, the average nationwide cost to insure a typical sedan rose by 5.7% to $1,031, according to the American Automobile Association (AAA). The latest figures available from the National Association of Insurance Commissioners show that Washington is the 16th most expensive place in the nation to insure a car, with Oregon ranking 26th. (Washington, D.C., tops the list; North Dakota is the least expensive.)

A recent report by the Insurance Information Institute (III) helps show that – declines in mileage aside – specific costs that fuel insurance premiums (like hospital services and legal fees) have risen much faster than the overall cost of living. What’s more, they’ve been compounded by factors like rising rates of insurance fraud and falling returns on insurance company investments.

The report reviewed the past decade (specifically, 2000 through 2009) and found that while consumer prices for all goods and ser vices have risen 24.6%, auto insurance has climbed 39.1%. The III cited costs for a few key services as main contributors to the 14.5 percentage-point gap:

Car-repair costs climbed 32.3%

Body-shop costs impact comprehensive, collision, and property-damage premiums.

Medical-care costs

During the years studied, hospital-care costs rose 81.8%, medical-care items climbed 44%, and physicians’ services jumped 31.1%. Medical costs impact liability, medical payments/PIP, and uninsured/underinsured motorist premiums.

Legal services increased 46.9%

Legal bills affect liability and uninsured/underinsured motorist coverages. And while the recession has reduced pressure on the roads somewhat, it’s negatively impacted other parts of the insurance equation:

Insurance fraud

The III estimates that insurance fraud accounts for 10% of the industry ’s costs. (Fraud runs the gamut from organized crime with elaborately staged accidents to ordinary consumers padding legitimate claims.) Between 2008 and 2009, the National Insurance Crime Bureau saw a 14% increase in the number of questionable claims it reviewed. The Coalition Against Insurance Fraud reports that during the same year, “give ups” where vehicle owners either abandoned or set fire to their cars climbed 26%.

Investment income

​Insurers use investments to offset claims and operating costs not covered by premiums. Just as personal 401Ks have suffered since the Dow Jones industrial average peaked at 14,165 on Oct. 9, 2007, insurers’ portfolios have taken a hit. When setting premiums in the foreseeable future, insurers no longer can assume that stock returns will provide a “cushion” around their rates.

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