When will we see inflation’s impact on auto insurance rates?

Inflation hit 5.7% in February, a multi-decade high, as supply chain issues and geopolitical conflict put pressure on prices.

Forecasters predict this number will go even higher before it goes lower.

“For quite some time, we were starting to raise the alarm bells that we saw pressures mounting on where inflation was going,” says Rebekah Young, director of fiscal and provincial economics at Scotiabank. “Our latest forecast has [inflation] averaging at almost 6% in 2022. Still elevated again, we see the annual average just above 3% in 2023.”

The Bank of Canada’s target for inflation is 2%, which means nearly every consumer and business is paying more for goods and services. Yet costs appear steady across the auto insurance industry, despite supply chain issues and other challenges in the automobile sector.

Auto insurance industry not immune to inflation

While many vehicle operating costs are up, including the price of gasoline and repairs, auto insurance prices are down year over year. However, as more people return to the office or hit the roads, these savings will likely disappear, adding to the cost of car ownership overall.

“Inflation is going to hit the insurance industry just like it’s hit almost every other sector, says Celyeste Power, chief strategy officer with the Insurance Bureau of Canada (IBC). “We’ve seen the price of gas, groceries, food, everything skyrocket and, unfortunately, we will not be immune to that in the insurance industry.”

Statistics Canada uses the Consumer Price Index (CPI) to measure the prices of consumer goods and services by grouping them into eight baskets, one of which is transportation. The transportation basket includes but is not limited to new vehicle purchases, leases, insurance, and fuel costs, reflecting what the average Canadian would consume or spend in each area.

“Within the category of insurance costs, we’ve actually seen insurance go down,” says Young. “If you compared the price index for auto insurance in February 2020 to February 2022, last month when we got data, it’s down by almost 5%.”

The dominating factor for this decrease was fewer people driving during the height of the pandemic. In 2020 and 2021, most insurance companies adjusted rates based on mileage and lower usage, offering Canadians more than $3 billion in premium relief.

“Looking ahead, I think it would be reasonable to see that trend starting to reverse,” says Young. “Quite positively, people are starting to get out and about, borders are reopening, and stringent measures are being lifted.”

While insurance premiums are down, the cost of new vehicles has risen by 4.7% and spare parts by 5.5%. Ongoing supply chain disruptions and labour market challenges impede vehicle production — an issue impacted further by the Russian invasion of Ukraine, as many materials come from that area.

Since insurance companies factor repair and replacement costs, fraud, and claims costs into premiums, this could impact car insurance rates, but it will take some time.

When will we see the impact of inflation on car insurance rates?

The auto insurance industry is highly regulated and competitive — two reasons why inflationary pressures are being staved off in this area.

For inflation to impact auto insurance rates, first, claims need to be made. Once a collision or damage occurs, a person will have their vehicle repaired or replaced. This step is where inflation is impacting costs now.

Whether it’s the repair, labour, or replacement cost of new or used vehicles, prices have risen. Because it takes longer to get parts, car owners have to wait longer to get their vehicles back, possibly using a rental car for longer (another service in high demand). If your policy comes with rental car coverage, your insurance company must foot the bill.

This, in turn, causes claims costs to be higher. Insurance providers can use this as justification to file for a rate increase with the provincial regulator, the Financial Services Regulatory Authority in Ontario.

Still, these rate increases will not impact auto insurance customers across the board — or right away.

“Insurance companies can’t change rates mid-term,” says Tanisha Kishan, RATESDOTCA expert and chartered insurance professional. “There will be a delay in rates being filed for an increase, and then the change will only hit the person on the following renewal.”

For instance, if you renewed your insurance policy in January and rates increase in March, you won’t see a change in your premium until the next year.

“If you go out to the supermarket today and there is a change in inflation, well, the cost of bananas, you’ll see that right away,” says Kishan. But this is not the case for auto insurance, where there is a multi-stage delay.

However, inflation is not the only factor that could cause your premium to increase.

“There are a lot of factors that could relate to a premium change upon renewal. One is your individual risk profile. So, if you’ve had any collisions or tickets in the previous year or a claim, that could impact your rate,” says Kishan.

“Then there is also the company as a whole. What type of rate changes did that company file for in that prior term? Whether they filed for an increase or decrease, that also plays a part in the rate you’ll see.”

How to keep auto insurance costs low

The nice thing about a competitive marketplace is that claims and inflation affect insurance providers differently. If one insurance provider paid out lots of claims, its rates might increase, while another provider’s circumstances may have an adverse effect.

“The best way to keep auto insurance rates affordable is by keeping those claims [costs] down, and inflation, of course, is not going to help with that,” says Power. “I can’t say what will happen to premiums; no one can. It’s a competitive industry that is highly regulated. But inflation will definitely impact the insurance industry.”

As for what customers can do to find savings, Power offers this advice: “Shop around. Ask questions. Ask questions about what coverage options are available to you within the coverage you have, and if you are in an accident, ask questions about your car repair — if you should be expecting delays because of the supply chain issues and what can be done about those delays.”