What’s going on with car insurance?

0:06Pushkin. Inflation's hot. I'm sure you've heard. The consumer price index has risen 8 % in the past year and a half which is pretty sweltering. But there's one category that really stood out to me recently, and that's auto insurance. This in the past year and a half is up 23%, just a staggering number. I think there may be a lesson here about inflation dynamics generally, and about a word that seems to be on everybody's lips these days, greedflation. This is Unhedged, the new markets and finance show from the Financial Times and Pushkin. I'm reporter Ethan Wu here in the New York studio, joined by Alphaville reporter, Alex Skaggs.

0:46Thanks for having me. Absolutely. Alex, just since this is our first time with someone from the Alphaville universe, what is Alphaville? You know, that's a great question. Alphaville is a finance and markets blog. We also write about economics, basically a little bit of everything. We're a little bit chattier than the main FT. We get to have a little bit of fun, lots of analysis, lots of deep dives. I think the question is more, what is Alphaville not? Well, perfect for the unhedged universe. We're trying to meld these together. Alex, you've written twice in Alphaville recently about auto insurance and just the staggering increase we've seen.

1:21But this for you started with a personal story. It did. So like many people, we moved upstate recently and we had to buy a car. And so when we went to go buy this car, like the whole process was going really smoothly until it was time to buy auto insurance. Now, neither of us had bought auto insurance before. And we end up getting this price that's like super, super high. I mean, it was like a really big upfront payment, really big monthly payments. And we realized that was kind of a go away price. Like these people did not want to cover us. So we ended up having to sort of like take a couple of days, leave the car on the lot and go find our own auto insurance, not through the dealer.

2:07It was wild. So we were sitting there thinking like, you know, we don't have car accidents. We don't have points on our license. Like, what is this about? And then I looked at the data and it turns out the CPI for car insurance is just risen astronomically, it seems like. Yeah. And it's not the only kind of insurance that's been going up recently. people have been talking a lot about state farms not covering home insurance in California for wildfire climate-related reasons. But that's a separate story. This story, I think you broke it down into three main reasons, labor, litigation, and Lambos.

2:38And we'll get to the Lambos, but let's start with labor. This is one that'll be familiar to anyone that's followed inflation. Yeah. So basically, it's costing a lot more to repair cars. The cost of labor for car repairs is going up. It's also taking longer. One of the interesting things here is that there aren't more car accidents. So everyone, and actually my initial thought was like, oh, people must just be crashing their cars more because I remember seeing all that data about everyone driving terribly in 2020. They're just more unhinged after COVID. Yeah, I guess so. But actually compared to 2021 and 2020, the number of car wrecks hasn't gone up, but the severity has gone up.

3:20And the severity just means the cost of repair and the cost of damages. So like if you hit someone else, the amount you have to pay, you know, as your damages and also to repair their car. So part of that, again, is the labor costs. Like it's, you know, the guy's actually doing the fixing. So that's labor, input costs, wages. It's more expensive to repair a car. I think that's straightforward. It's a pretty common inflation story. But then there's litigation. And this was a little bit more specific to car insurance, as I understand. Yeah, this was a really interesting aspect of it. It's not that there are actually more car accidents happening.

3:54It's that the car accidents happening are getting higher insurance payouts. And part of the reason for this, at least in the first quarter, was related to this Florida law. Basically, they passed a law that could limit the amount of damages people make in these kinds of lawsuits over insurance and injuries and stuff. And so lawyers raced into court to get their settlements, get everything sorted out before that new law went into effect. And it was actually pretty interesting. In their first quarter calls, a lot of the executives at these insurance companies were like, well, you know, we don't want to talk too much about why this happened or what it's related to, but all we can say is that it's good for America.

4:36Let's not say anything else about Florida laws or government. So Ron DeSantis, responsible for auto insurance inflation. Oh, God. Don't quote me on that. So that's litigation. And then there's what we've kind of derisively called Lambos. This is like a crypto joke. They're really obsessed with Lamborghinis for some reason, but they're not the only ones obsessed with cars right now. True. So car prices, actually used car prices specifically. I don't know, maybe there are more used Lambos hitting the market after last year's crypto maps. Right, you got to cash out. Yeah. But the cost of used cars has gone up and it's continuing to go up too, which is pretty interesting.

5:17And part of that has to do with semiconductors. Chips are still harder to get. Some of it too, which we sort of touched on in the last two things, is that it's not necessarily the cost of replacing a totaled car, but more cars are getting totaled. So that also is increasing the amount that insurers have to pay out. Right. And then if you have a more expensive car, presumably, and the insurance has agreed to pay 20%, 30%, 40 % of whatever your car's value is, the car's worth more, the insurer has to pay more. So that means they have to make up for that on the premium side. You therefore have inflation.

5:51But I mean, the part I don't understand is why more cars are getting totaled, right? That's a really good question too. You can kind of blame smart cars, I think, for this. Okay. Or partly. The thing is, again, this is so broad a topic and there's so many different things that go into car insurance inflation. Who knew? But because a lot of the cars are more high tech, it's not as easy for hobbyists or insurers or car repairmen to just replace a part if it's broken. Right. So everything's sort of like tougher, I guess, to replace or fix. So cars are getting totaled with less damage. Right, right, right.

6:28All the cars these days are just computers on wheels. Exactly. And so you break one part, you break it all. So, I mean, Alex, the picture you painted, I think, will have some familiar elements and some less familiar elements. I mean, the familiar ones are you've got wage increases. You've got input cost increases. Name a sector. It's happening in that sector. That's the story of inflation right now. But then you have all this like weird random idiosyncratic stuff, right? You've got the law in Florida and you've got the design choices of car manufacturers influencing the ability to repair it. And to me, that feels like maybe a broader story about inflation is that you have some base pressures from wages and input costs.

7:04And then you have idiosyncratic pressures. And those idiosyncratic pressures matter. Just because they're random and weird doesn't mean that they don't feed into those inflationary dynamics where, hey, if your prices have gone up, that means as a consumer, your purchasing power has gone down and you need to demand higher wages to keep up with the rising cost of stuff. And, you know, I think we've seen plenty of evidence recently that idiosyncratic price shocks can show up in headline inflation data. I mean, there was a really fun story the FT had out of Sweden. You know, Beyonce tickets were influencing hotel prices and that showed up in Swedish CPI.

7:39I mean, random stuff matters. Yeah, yeah. So one of the things that I find most interesting about this is that like everyone, not everyone, but a lot of Americans need car insurance. So like I had guys at the grocery store the other night just stop me in the middle of my like checkout session and be like, hey, guess what? This guy pays for car insurance. And I was like, what? And it was funny because I had just written about it and I was like, what is going on? But it's just everyone talks about it, you know, and the Beyonce thing is amazing. I just saw the piece about headline inflation being affected by that.

8:14But I've also found out that Taylor Swift, just her being in a city can increase hotel revenues like really, really noticeably, which makes sense, you know, because Swifties are famously devoted. But also, like, I wonder if that's going to show up, you know, or I wonder if it's been showing up. Actually, I remember looking at the CPI data and hotels are actually up. Yeah. Hotel prices are up a lot. But zooming out, though, like one thing we don't see as much evidence of in this story is this idea of greedflation. And this, for people that aren't familiar, this has been widely talked about in the past few months in kind of economics and finance discourse.

8:52And it's this idea that in an inflationary period, companies use inflation, a general inflationary environment, as a coordinating mechanism, as a way to all raise prices together. And, you know, in like a normal environment, that would be potentially illegal. It's obviously oligopolistic. But, hey, if your competitor's raising their prices, then you have a pretty good reason to raise yours too if they're getting away with price increases over there. And you're not seeing as much evidence of that in this auto insurance story. Yeah. So the auto insurers all track their margins in great detail, right?

9:25So Allstate, Progressive, all those guys. Margins just being the difference between cost and price. Yeah, their profitability, I guess, of their auto insurance business specifically. They were like, yeah, there are fewer claims, but the claims that we do get cost more. The interesting thing is that, you know, again, auto insurers are losing money underwriting these policies on net, you know, on aggregate across the country. So the greedflation or the greed, if it exists, isn't there. And there are arguments you can make about the greed showing up in other places like, say, trial lawyers in Florida or like, I don't know.

10:00A greedy bunch. You know, I'm not one to. Please don't email me trial wars. Yeah, I know. I can't make judgments. But anyway, another interesting thing is that New York State recently sued Hyundai and Kia because of a TikTok trend that is leading them to get stolen more. Uh-huh. So apparently you can start them or some kinds you can start without keys. And this has become the Hyundai-Kia TikTok challenge. So it's a steal a car challenge. It's on TikTok. Great. For some reason. I love that. And so the thing is, like, the car insurance executives have not been saying, like, oh, this is why we're losing money.

10:40But on the other hand, like, if your car gets stolen, insurance covers it a lot of the time, right? Right. So I don't know. If Beyonce and Taylor Swift can influence headline CPI, TikTok teens should be able to do it, too. I don't know if that's a moral stand, but it seems intellectually true. Oh, man. We'll be back in a moment with Long Short.

11:13Welcome back. This is Long Short, that part of the show where we go long and short. One company, stock, New York sushi restaurant, whatever it is, we go long one thing, short one thing, except on Tuesdays, apparently, where Katie Martin and I go long two things. We're going to try to not do that next week. And today we definitely have a long and a short. Alex, I'm short the US housing market. Not like Michael Burry short, where it's all going to collapse in 2008 style, but I do think it's going to stay pretty frozen for a while. And we wrote about this in the Unhedge newsletter today. A lot of people are talking about a big pop in housing starts, the bottoms in in housing.

11:47Jay Powell's talking about this. I think it's just so hard with 6 % mortgage rates, no one wanting to depart with their locked in 2 % mortgage rate for any activity to really show up in this market. So at least in terms of the market unthawing, I'm short. That makes sense. That's really interesting. I am long investor presentations from SoftBank's CEO, Masayoshi San. Even bolder. He's back. He's back. I'm so excited. So as you know, the past year was a little dim for tech. Things were a little rough in 2022 for tech stocks and for SoftBank and for basically everyone who is involved in big tech.

12:23And Masayoshi San is famous for these quirky investor presentations that are just like there are robots, there are illustrations, there's philosophy. We love them. And he stepped back during this bad time for tech. And we were very sad about this. And then now, you know, just this week, he comes out, he's got an old style soft bank investor presentation, and it is delightful. He says he's shifting to offense mode. He asks, what is mankind? mind. He's talking about the superhuman evolution of AI, happiness through technology. It's just, I missed, you know, I missed it. He's back. He's back. He's back in good old masa fashion.

13:09All right, Alex, thanks so much for being here. We'll be back listeners on Tuesday with another Katie Martin episode, hopefully this time featuring a long Andy short. We'll catch you then. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, John Schnarz, Eric Sandler, and Jess Trulia. FT Premium subscribers can get the Unhedged newsletter for free, and a 90-day free trial is available to everyone else.

13:47Just go to ft.com slash unhedged offer. I'm Ethan Wu. Thanks for listening.