How a recession could impact your car insurance
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Inflation is crunching budgets across the country. In fact, Americans are spending an average of $433 more per month in October 2022 compared to October 2021. 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
2022 has been a wild financial ride for American households. Inflation rose rapidly, which has caused the Fed to undertake a series of aggressive rate hikes in an attempt to control the situation. While inflation has cooled recently — it peaked in July at 9.1 percent year over year and currently sits at 7.7 percent year over year — higher prices have taken their toll on Americans’ budgets.
In a Bankrate survey, 55 percent of working Americans said that their pay hasn’t kept pace with inflation. The higher cost of living already makes things tough, but when pay raises can’t keep up, American households may end up treading water, or worse, losing money each month. The outlook is grim: nearly 7 in 10 Americans are worried about a recession. Economists aren’t much more optimistic, with Bankrate’s Third-Quarter Economic Indicator showing a 65 percent chance of a recession by mid-2024.
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. The economy did shrink for six consecutive months in 2022, but the labor market has also remained strong and unemployment filings are at their lowest level in history, something that is 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.”
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. For example, Stephen Crewdson, Senior Director at J.D. Power, told Bankrate that the current economy is “very different from the Great Recession where [car insurance] premiums were relatively flat. Shopping and switching went down during the Great Recession. People were hunkering down, they were sticking with what they knew.” Today’s economy, with its red-hot inflation, is causing different struggles.
Recessions can mean higher car insurance rates
Inflation is causing car insurance rates to rise. This is because claims are becoming more frequent and more expensive as the costs to repair and replace vehicles, as well as the costs of medical care after an accident, increase. When claims cost more, insurance companies compensate by charging higher rates to ensure they can continue to pay out losses at the higher cost.
“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.
Rate increases have continued throughout 2022, and the projections for 2023 are for continued rate increases.
— Stephen CrewdsonSenior Director at J.D. Power
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. For example, California didn’t approve rate increase requests for over two years beginning in 2020 and ending with a recent approval for Allstate. 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 January 1, for example, but a rate increase for renewals went into effect on February 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 January 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 2023.
Recessions may leave you underinsured
If you’re faced with the reduced spending power that is common in a recession, you may look to 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 cause a claim. 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. In a study conducted by LexisNexis, personal insurance shopping rates began a drastic increase starting in July 2022. Shopping volume increased by 5.3 percent year over year by August 2022. While the largest recent spike in shopping happened around April 2021, this upward trend could indicate that policyholders are ready to make a change to find lower car insurance rates.
Beth Riczko, President of Property & Casualty Personal Lines for Nationwide, confirmed this, telling Bankrate that “Nationwide’s Agency Forward research revealed that nearly half of consumers expect their insurance premiums to increase (48 percent), and that may be why more than half have already looked or will look for ways to save on premiums for their existing policies (56 percent).” Because car insurance companies charge different rates, shopping around and switching car insurance companies could help you find a cheaper rate.
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.
In personal finance, the most important step Americans can take is to focus on what they can and cannot control.
— Sarah FosterBankrate Senior Economy Reporter
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: “Shopping and comparing is absolutely the right thing to be doing right now,” Grant says. Even the best car insurance companies have different rating systems, which means the same coverage could cost more or less with different companies.
- 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.”
…while cutting coverage may seem like a reasonable idea in the short term, it could actually be more expensive for consumers in the long run.
— Beth RiczkoPresident of Property & Casualty Personal Lines, Nationwide
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 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.
|Liability coverage limits||Average annual premium for full coverage||Average monthly premium for full coverage|
|Minimum liability limits||$1,616||$135|
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, caused car insurance rates to rise and prompted an uptick in insurance shopping. 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.