How a recession could impact your car insurance

Inflation was a growing concern throughout 2023. If you’re trying to lower your monthly bills, you might be eyeing your car insurance premium as a place to cut back. While saving on car insurance can be beneficial to your bottom line, you should know that some strategies could put you at greater financial risk in the long run. Bankrate can help you understand how a recession affects your car insurance and show you what steps to consider — and which ones you may want to pass on — as you’re trying to save on your car insurance in a recession.

The current state of the economy

The term “recession” has been bounced around throughout 2023 — but are we actually in one? Or is there one on the horizon? Although economists waved the red flag throughout the year, the widely-forecasted recession never quite reared its head. That said, 59 percent of Americans still feel like the economy is in a recession, according to a survey from Bankrate.

But what is a recession? Bankrate Senior Economy Reporter Sarah Foster explains that traditionally, a recession is when the economy shrinks for six consecutive months, although the finer points are much more complex. Data from the U.S Bureau of Labor Statistics shows that unemployment levels have remained low, around 4 percent, for 13 consecutive months, and that the job market has continued to grow — both of which are incongruous with a recession. “There’s only one group of economists who can make the official declaration, and that’s the National Bureau of Economic Research’s Business Cycle Dating Committee,” Foster says. “Until then, we will never truly know. But it might be the least useful question for Americans’ personal finances.”

The economy may be sporting strong numbers on paper, but high interest rates and rising inflation have Americans feeling otherwise. Interest rates sit at a 22-year high of 5.25 to 5.5 percent. Although national inflation has cooled off to 3.1 percent from a 9.1 percent peak in July 2022, three in five workers report that their incomes have not kept up with inflation for the past 12 months.

That’s because both recessions and inflation “take away Americans’ ability to buy and do what they want and need,” according to Foster. Whether or not the current economic situation is ever officially dubbed a recession is just a matter of terminology. What matters is that, due to inflation, spending power has already been reduced.

How a recession affects your car insurance

Every recession is different, which means that with each economic downturn, you may face different challenges with your car insurance. Unsurprisingly, this usually translates to higher rates and drivers needing to reassess their coverage limits.

Recessions can mean higher car insurance rates

Average auto insurance rates have been on the rise for the past several years, and 2024 is not looking like it will be the exception. Inflation is partially to blame for the increase, according to Kenneth Chavis IV, a senior wealth advisor at Versant Capital Management: “Inflation has impacted the auto insurance industry similarly to many other industries. Over the last few years we’ve seen a sharp rise in the cost of premiums for auto insurance driven in part by inflation, specifically higher labor costs for repairs and higher replacement costs for vehicles as well as component parts when repairs are needed.”

And he is not the only one who thinks so. “We’re paying more in just about everything we consume, and [insurance] is one more additional piece,” explains Tim Grant, senior director of underwriting at LexisNexis. While the cost of car insurance will vary based on your own rating metrics, it’s likely that many consumers will begin or continue to see increases in their premium.

Inflation has let up a bit in recent months, but don’t expect car insurance rates to go down any time soon. Insurers feel the effects of inflation, but they can’t immediately increase rates. First, they must file for approval for rate hikes with each state’s Department of Insurance, and there’s no guarantee of approval. If a rate change is approved, it generally takes effect on one date for new policies and another date for renewals. This means that it could take a full year for each company’s book of business to be affected by a rate change.

If your policy renewed for a year on Jan. 1, for example, but a rate increase for renewals went into effect on Feb. 1, you wouldn’t see your rate increase a month after your renewal. Instead, your policy would be rolled into the new rating system upon your renewal after the rate change, so Jan. 1 of the next year (if you have a 12-month policy). This means that, even if inflation continues to trend downward, we’ll likely see rate increases throughout 2024.

Recessions may leave you underinsured

If you’re faced with the reduced spending power that is common in a recession, you may look at your insurance premium as a way to save money. If you’re tempted to cut your coverage back to get a lower premium, you should know that this is a risky move. Lower limits may result in a cheaper policy, but you also expose yourself to higher out-of-pocket costs if you are involved in an accident. If you trim your limits back too far and find yourself having to pay out of pocket, you could damage your finances more than if you paid for the higher limits in the first place.

The recession that is currently looming deals heavily with inflation. Car insurance costs are rising due to the rising cost of claims, but unless you’ve made a manual change to your policy, your coverage limit is staying the same. This means that your car insurance coverage may not go as far as it used to, considering how much more expensive the aftermath of an accident has become. Essentially, inflation may be leaving you underinsured. While this mostly affects drivers who purchase state minimum coverage, it doesn’t hurt to review your car insurance limits with your agent or a representative from your company. If you feel that you may be underinsured due to inflation, you could increase your coverage to provide additional financial protection while looking for ways to offset your increases, through discounts or shopping your policy.

Recessions may prompt you to shop

Car insurance rates are rising across the industry, but that doesn’t mean that every company charges the same rates. Additionally, rates vary by state, so learning about average rates in your area could help you decide if your premium is competitive. Shopping your car insurance with multiple carriers can be an impactful way to find lower rates, and consumers seem to know this.

Data from LexisNexus suggests that, since 2021, personal auto insurance shopping leaps up in January of each year, which could be when drivers take more time to balance their budgets for the new year. Although insurance shopping was down in Q3 2023 compared to Q4 2023, with Americans’ budgets growing tighter, we could see an uptick in 2024.

How to save on car insurance during a recession

If you’ve seen your car insurance premium increase due to inflation, or if you simply need to find some wiggle room in your budget because of inflation’s insidious effects, you may be able to take steps to lower your premium.

Car insurance rates are at least partially within your control. Here are some steps that might help you save on your car insurance:

• Shop around: Even the best car insurance companies have different rating systems, which means the same coverage could cost more or less with different companies. For the same coverage, you could find a better deal if you shop around and compare quotes.
• Take advantage of discounts: Most insurance carriers offer car insurance discounts to help you take control of your premium. You could save by bundling your policies with one company, opting for paperless bills and statements, or paying in full.
• Use a telematics device: Telematics discounts use a plug-in device or mobile app to track your driving patterns. If the data reveals that you’re a generally safe driver, you could earn a discount.
• Keep a clean driving record: Having accidents, tickets or DUI convictions will very likely increase your car insurance premiums and could mean you’re viewed as a high-risk driver. Practicing defensive driving and other safe driving techniques could help you avoid costly incident surcharges on your auto insurance policy.
• Review your coverage: While making big changes to your car insurance could leave you in a riskier overall financial position, you may be able to remove some optional coverage types that you don’t need. For example, if you have a separate roadside assistance service, you might be able to remove the endorsement on your car insurance. Just be sure to review any changes with an agent first to make sure you understand the full implications.

Make sure your finances are still protected

Saving during a recession means more than just thinking about your bottom line. It means recognizing that insurance is, at its core, a form of financial protection. When it comes down to it, cutting back on your car insurance may not actually be the best place to find room in your budget. Grant explains: “The risk is, if you look to drop coverage at a period where repair and replacement is at an all-time high, you could put your family in a higher financial hardship by cutting back.”

Car insurance is designed to provide a financial safety net in the aftermath of an accident. If you cut your coverage back too far, you may be faced with paying damages out of pocket. In such an inflationary environment, that could be even more financially damaging than usual.

In general, lowering your car insurance coverage isn’t the most effective strategy to save on your premium. Bankrate’s research into 2022 average car insurance rates shows that, for a full coverage policy, there’s very little variation between the most common limits of liability coverage. Dropping from a 100/300/50 policy, for example, down to state minimum limits will only save you an average of $13 per month, based on our assessment.

The bottom line

The U.S. economy may or may not officially enter a recession, but the designation likely doesn’t matter to average households. Inflation has already chipped away at spending power and caused car insurance rates to rise. While shopping around to find a cheaper car insurance rate is a solid savings strategy, dropping your coverage won’t usually save much and could expose you to greater financial risk. Inflation has many Americans in its vice-like grip, but maintaining proper car insurance coverage could help ensure that you come out of this rough patch unscathed.