Auto Insurance Affordability: Countrywide Trends And State Comparisons

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RESEARCH BRIEFSeptember 28, 2021Auto Insurance Affordability:Countrywide Trends and State ComparisonsThe affordability of auto insurance is an important public policy issue, given the requirements innearly all states for drivers to maintain minimum coverage. While some current affordabilityconversations focus on differing opinions about how insurance costs should be distributed andshared, underlying costs ultimately drive overall affordability. Examining the cost drivers indifferent states can reveal opportunities for improving affordability for all consumers.Underlying costs ultimately driveoverall affordability.IRC has developed a measure of auto insurance affordability, the affordability index, which is theratio of average auto insurance expenditures to median household income. It measures theproportion of household income used to pay for auto insurance; a higher index indicates lessaffordable insurance. Data for median household income are from the U.S. Census Bureau. Dataon average auto insurance expenditures are published by the National Association of InsuranceCommissioners (NAIC).1 While some studies of affordability estimate insurance costs bygathering rating quotes for minimum coverage, the NAIC measure provides an estimate of whatconsumers actually spend per insured vehicle. As such, the data reflect differences betweenstates in terms of coverage requirements, policy selections, tort laws, and other factors.2The goal of calculating an affordability index is not to establish a particular threshold at whichauto insurance becomes affordable or unaffordable. Such a threshold would be subjective, asdifferent parties can reasonably disagree about what would constitute affordable insurance.Rather, the index is a tool to measure and compare auto insurance affordability over time andacross jurisdictions.1NationalAssociation of Insurance Commissioners, Auto Insurance Database Report 2017/2018, March Federal Insurance Office calculates a similar affordability index, based on estimated premiums for liability coverages meetingeach state’s financial responsibility laws. See Study on the Affordability of Personal Automobile Insurance, January ility%20study web.pdf).

2This analysis looks at the affordability of auto insurance for the overall population and does notaddress the issue of affordability among underserved populations. Affordability among minorityand lower-income consumers is an important topic but requires the examination of moregranular data than the countrywide and statewide data presented in this analysis. Moreover, it isimportant to note that affordability for traditionally underserved consumers is ultimatelydetermined by underlying costs, just as it is for the overall population. A recent analysis of NAICdata showed that the higher premiums in lower-income ZIP codes were in line with the higherclaim costs in those areas.3 Efforts to improve the affordability of auto insurance in those areasmust address these higher costs.Countrywide TrendsIn 2018, the most recent year for which data are available, the average auto insuranceexpenditure was 1,057. Median household income in 2018 was 63,179. Thus, U.S. householdsspent 1.67 percent of their income on auto insurance, a slight increase from the previous yearbut significantly lower than the peak of 2.03 percent in 1993. Future data will help illuminate theimpact of the COVID-19 pandemic on driving and insurance costs.The historical trend in the expenditure-to-income ratio shows that auto insurance has becomemore affordable over time for the average U.S. consumer. In the 1990s, the median householdspent 1.93 percent of its income to pay for auto insurance. The index dropped to an average of1.71 percent in the 2000s and has averaged 1.61 in the 2010s.Auto Insurance Has Become More Affordable Over TimeAuto Insurance Expenditures as Percent of Median Income1.91%1.67%1990s Average 1.93%2000s Average 1.71%2010s Average 1.61%1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20203RobertW. Klein, “Matching Rate to Risk: Analysis of the Availability and Affordability of Private Passenger AutomobileInsurance,” National Association of Mutual Insurance Companies, January 2021,https://www.namic.org/pdf/publicpolicy/210202 naic study.pdf (accessed August 16, 2021).

3State RankingsBased on the 2018 affordability index, auto insurance was most affordable in Iowa, wherehouseholds spent 1.02 percent of income on auto insurance. Other states with low expenditureto-income ratios in 2018 included North Dakota, Hawaii, New Hampshire, and Virginia. By a widemargin, the least affordable state in 2018 was Louisiana, with an index value of 3.09 percent.Rounding out the top-five least affordable states were Florida, Michigan, Mississippi, andGeorgia. In 2019, Michigan reacted to affordability concerns by enacting significant autoinsurance reforms to address costs in its no-fault system.The index is a ratio, so some states with high average auto insurance expenditures rate lower onthe affordability rankings because of higher-than-average median income. For example, theDistrict of Columbia had the third highest average expenditure in 2018, but, with a medianhousehold income that was more than 35 percent higher than the countrywide figure, it rankedas the 21st least affordable jurisdiction. Other states are pushed up the ranks of least affordablestates by having low median household income. For example, Mississippi’s auto insuranceexpenditures were 8 percent below the countrywide average but its median household income isthe lowest in the nation; as a result, Mississippi ranked as the fourth least affordable state forauto insurance in 2018.Louisiana, Florida, and Michigan have maintained their respective rankings as the first, second,and third least affordable states since 2014. The state with the most deterioration in affordabilitybetween 2014 and 2018 was Georgia, where an 8.6 percent annualized increase in expendituresled to a 0.42 point rise in the expenditure-to-income ratio. West Virginia showed the mostimprovement in affordability, with a 0.36 point decline in the index, buoyed by slower-thanaverage expenditure growth and higher-than-average income growth.States Exhibit Dramatic Differences in Auto Insurance Affordability2018 Auto Insurance Expenditures as Percentage of Median IncomeU.S. Average 1.67%IA ND HI NH VA VT ME NE WI SD MN UT WY ID KS IN OH WA IL MA NC AK MD OR MT CA MO TN PA CO DC CT AZ OK KY AR AL WV NJ NM SC TX DE NV NY RI GA MS MI FL LAMore affordableLess affordable

4Cost DriversUltimately, the affordability of auto insurance is determined by the key underlying cost drivers.Efforts to improve affordability, both overall and within traditionally underserved populations,must address these costs. The specific factors driving high insurance costs can vary from state tostate. Many of these key cost drivers are described below and shown in the following table.Accident frequency: Greater traffic density, poorer road conditions, and other factors lead tomore frequent accidents in some states. Differences in accident frequency are approximated byshowing each state’s number of property damage liability claims filed per 100 earned car-years.The source is the Fast Track Monitoring System; data shown are from 2019.4Repair costs: The cost of repairing vehicles varies across states. The table shows the medianclaim payment amount for private passenger auto property damage liability and collision claimscombined. The source is data collected for the 2021 IRC report Patterns in Auto Physical DamageInsurance Claims, with data from 2018.Tendency to file injury claims: The propensity to file an injury claim tends to be higher in lessaffordable states. The ratio of bodily injury (BI) liability claim frequency to the frequency of autoproperty damage (PD) liability claims provides a measure of the likelihood that an injury claimwill be filed that accounts for differing accident rates. The source is the Fast Track MonitoringSystem; data are from 2019.Injury claim severity: The amount paid per claim for auto injury insurance claims is a key costdriver. Because the mean payment is highly influenced by the policy limits in a given state, themedian payment is shown, based on 2017 data, for all injury coverages combined from the IRCstudy Countrywide Patterns in Auto Injury Insurance Claims.Medical utilization: High rates of utilization of expensive diagnostic procedures and medicaltreatments are a common cost driver in states with affordability issues. Using 2017 data from theIRC study Countrywide Patterns in Auto Injury Insurance Claims, a medical utilization index wascalculated based on the usage of magnetic resonance imaging (MRI).Attorney involvement: Attorney involvement in auto injury claims has been associated withhigher claim costs and delays in settlement time. The percentage of claimants represented byattorneys across all five private passenger coverages is shown, with 2017 data from IRC’sCountrywide Patterns in Auto Injury Insurance Claims.Claim abuse: Although difficult to measure, insurance fraud is a factor in the high cost ofinsurance in several states. Claim abuse can take the form of outright fraud but also includes4Although2020 data are available from the Fast Track Monitoring System, 2019 data are used in the table for better consistencywith other pre-pandemic data. The 2020 distribution of states by claim frequency is not significantly different from prior years.

5buildup, which refers to unnecessary or excessive medical treatment or other charges in anotherwise legitimate claim. The table shows the percentage of all auto injury claims from IRC’s2012 closed-claim study that were found by file reviewers to involve the appearance of claimfraud and/or buildup.Uninsured motorists: High rates of uninsured motorists can be both a symptom and a cause ofaffordability challenges. The data shown are from IRC’s study Uninsured Motorists: 2021 Edition,with 2019 being the latest year available.Litigation climate: The legal environment for settling auto insurance claims varies by state. Forexample, some states allow third-party bad-faith lawsuits for insurance claims while others donot. The Institute for Legal Reform conducts an annual survey of business leaders seekingopinions about the legal environment. The 2019 survey from provides a proxy for each state’slegal environment.5The table that follows shows a value for each of these cost drivers in each state, with colorcoding representing where each jurisdiction rates relative to the rest of the country. The redhighlights show that the states with higher expenditure-to-income ratios tend to have lessfavorable rankings with respect to these cost drivers, while the green highlights illustrate themore favorable rankings among the more affordable states.This visual evidence shows the importance of these factors in determining overall auto insuranceaffordability. Moreover, cost driver analysis can provide direction for policymakers in individualstates exploring ways to improve the affordability of auto insurance in their specific jurisdictions.Cost driver analysis can provide direction forpolicymakers in individual states exploring ways toimprove the affordability of auto insurance in theirspecific jurisdictions.5U.S.Chamber Institute for Legal Reform, 2019 Lawsuit Climate Survey: Ranking the States, September 2019-lawsuit-climate-survey-ranking-the-states/ (accessed August 19, 2021).

6State Auto Insurance Affordability Linked to Key Cost DriversInjury Fraud 3.403.814.543.752.60 2,456 2,340 2,508 2,053 2,126 2,250 1,951 2,436 2,468 2,524 2,445 2,603 2,676 2,299 2,565 2,676 2,204 2,658 2,469 2,362 2,545 2,941 2,369 2,440 2,730 2,587 2,708 2,703 2,493 2,968 1,964 2,653 2,588 2,840 2,699 2,608 2,741 2,387 2,784 2,497 2,195 2,578 2,452 2,379 2,854 3,607 2,836 70 2,375 2,65031.846.9 2,518 2,002 2,815 3,393 3,665 5,000 2,201 3,074 3,740 3,142 5,400 3,000 4,000 2,250 4,500 4,078 3,821 4,796 4,926 3,744 2,000 4,262 2,500 3,500 3,503 4,908 3,804 4,063 2,577 4,450 3,000 7,783 5,000 4,491 6,000 4,184 5,000 4,785 8,918 4,588 4,121 3,244 5,979 7,500 7,500 4,950 5,000 4,023 6,299 7,250 tionClimateInjury 4%2.17%2.27%2.43%2.61%3.09%Repair CostsIowaNorth DakotaHawaiiNew h shingtonIllinoisMassachusettsNorth uriTennesseePennsylvaniaColoradoDistrict of AlabamaWest VirginiaNew JerseyNew MexicoSouth CarolinaTexasDelawareNevadaNew YorkRhode cidentFrequencyExpendituresas Share ofIncomeRed highlights show less favorable rankings; green highlights show more favorable rankings. See notes on previous .360.0

7About Insurance Research CouncilThe Insurance Research Council (IRC), affiliated with The Institutes, is an independent, nonprofitresearch organization supported by leading property and casualty insurance companies andassociations. IRC provides timely and reliable research to all parties involved in public policyissues affecting insurance companies and their customers. IRC does not lobby or advocatelegislative positions.The Institutes, a leading provider of risk management and insurance knowledge solutions, offerinnovative education, research, networking, and career resources, including professionaldesignations such as the CPCU program, leadership programs, continuing education courses,events and conferences, associations, custom solutions, publications, and assessment tools.CPCU is a registered trademark of The Institutes. All rights reserved.2021 IRC MembersAllstate Insurance CompanyAmerican Family InsuranceAmerican Property Casualty Insurance AssociationAmica Mutual Insurance CompanyThe Hanover Insurance GroupLiberty Mutual GroupNational Association of Mutual Insurance CompaniesSentry InsuranceState Farm Insurance CompaniesUnited Services Automobile Association2021 IRC Advisory BoardPhil Thompson, American Family Insurance, ChairpersonGavin Blair, Hanover Insurance GroupMichael Braaten, State Farm Insurance CompaniesMichael Gillerlane, Amica Mutual Insurance GroupSteve Hylka, Liberty Mutual GroupMichel Leonard, Insurance Information InstituteHeather McIntosh, United Services Automobile AssociationRobert Passmore, American Property Casualty Insurance AssociationAndrew Pauley, National Association of Mutual Insurance CompaniesKaren Schecht, Allstate Insurance CompanyEthan Vaade, Sentry InsuranceVictoria Kilgore, The Institutes

Auto Insurance Expenditures as Percent of Median Income 1990s Average 1.93% 2000s Average 1.71% 2010s Average 1.61%. 3 State Rankings Based on the 2018 affordability index, auto insurance was most affordable in Iowa, where households spent 1.02 percent of income on auto insurance. Other states with low expenditure-

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