Why Car Insurance is Out of Control

Briton Ryle

Written By Briton Ryle

Posted June 21, 2024

My son needed a car for his senior year at the University of Maryland. He’d landed a part-time job building robotic exoskeletons in Baltimore and needed to commute from College Park a few days a week. 

So we hatched a plan. 

He was visiting his sister in New Orleans last year for spring break. So I took the opportunity for a few days in the Big Easy with my kids and also to deliver my 10-year old E350 to him for an extended loan. I wasn’t using it that much and I figured it would be incentive to (finally) get the 76 Corvette I’ve been rehabbing on the road…

Since he still had to finish his junior year and all of his senior year to go, I also agreed to pay his car insurance while he was in school.

Oh the best laid plans…

I’ve put a new steering box, brake lines, calipers, master booster, steering column, radiator, carburetor, and carpet in the Corvette. Got the engine running really well. But I seriously underestimated my aversion for the tedious electrical work needed to get all the dials and gauges, wipers and lights hooked up…

I even went around to a few mechanics in town and offered up $1,000 bucks to do the work. No takers. Nobody wants the headache when they can do just fine changing oil and brake pads, thank you very much…

So the Corvette sits. 

The other flaw in my plan was car insurance. Holy moly!

After putting him on the car with USAA, the insurance payment went up to $335, I think it was. Then he left the sunroof of the Benz open during a downpour and the car was totaled. Seemed a little extreme but whatever. 

So he got a used Mazda SUV – a 2018 CX-9, I think. The insurance payment ballooned to $450 a month! It’s completely insane!

Corporate Gouging

It’s well documented that corporations have used the cover of inflation to raise prices far beyond any increases to their own costs. After all, if consumers hear the word “inflation” and start expecting higher prices, why not oblige and make some more money?

Last year, when inflation was at its highest, companies like Coca-Cola, Pepsi, Cal-Maine, Proctor and Gamble, and Hershey (among others) all had quarterly earnings reports where sales volumes were flat or even lower – but net profits grew double-digits. There’s only one way that happens – higher selling prices more than offsett costs and lower sales volumes. 

When it comes to car insurance, something similar is in play:

car ins

No surprise that car insurance prices got crushed during the pandemic (though I don’t remember my bills going down). 

Couple things: 

  1. this chart shows that car insurance prices fell 15% during the pandemic. If a price falls 15%, price then has to rise 30% hike to get back to where it was. That has been accomplished. But car insurance is still posting 20% year-over-year price hikes.
  1. Did you know that Warren Buffett owns GEICO? In 2022, GEICO lost $1.9 billion. Last year, GEICO’s profits set a record, raking in $3.6 billion in pretax profit. In total, Buffett’s insurance holdings posted $5 billion in pretax profit. Refer back to that chart to see when insurance premiums really started ramping. Uncle Warren and that stupid lizard are gouging us.
  1. Insurance companies have to get price hikes approved by regulators at the state level. It’s reported that there was a massive backlog of price hike requests coming out of the pandemic. Recall also that used car prices, especially, surged during the pandemic to some ridiculous levels. Used car prices have moderated a lot since those highs. But I will bet you dollars to donuts that insurance companies used the highest possible used car prices for the applications to regulators to raise prices.

The Nature of Inflation

Prices for used cars and insurance premiums are a component of the Consumer Price Index (CPI). Along with rents, these have been among the most stubborn components of the CPI index. 

It could certainly be argued that these prices are helping to keep the CPI elevated and also keeping the Fed from cutting interest rates. 

The big irony is that corporate earnings are at record highs. So is the stock market. It’s not a coincidence that profits, stock prices and consumer prices have all risen in tandem. Inflation is often good for stock prices.

Corporations have done exactly what they are supposed to do: make more money. 

Investors have (mostly) done what they are supposed to do: buy stocks.

Now if you’re looking ahead and thinking “well, if the inflation underpinning the surge in corporate profits this year eases, how will profits grow next year?”

It’s a good question. The answer is twofold. One, prices aren’t going to reverse. Corporations will still have a higher baseline of revenue to work with. Two, cost-cutting. Unemployment has been ticking higher. And if the Fed starts cutting rates, we will see lower borrowing costs, which could also make for stronger consumer spending.

Enjoy your weekend, I probably won’t because I am determined to start getting the Corvette’s dash hooked up.

Briton Ryle
Chief Investment Strategist
Outsider Club

X/Twitter: https://twitter.com/BritonRyle

You might like these articles:

Hammer is a Wannabe Farmer


Speaking of Rate Cuts


Here’s a Three Uranium Stocks You Should Know