What’s going on with car insurance?

This is an audio transcript of the Unhedged podcast episode: What’s going on with car insurance?

[PUSHKIN INTRO]

Ethan Wu
Inflation’s hot. I’m sure you’ve heard the consumer price index has risen 8 per cent 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.

[MUSIC PLAYING]

Ethan Wu
This in the past year and a half is up 23 per cent, 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 Scaggs.

Alex Scaggs
Thanks for having me.

Ethan Wu
Absolutely. Alex, just since this is our first time with someone from the Alphaville universe, what is Alphaville?

Alex Scaggs
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.

Ethan Wu
Yeah.

Alex Scaggs
I think the question is more, what is Alphaville not?

Ethan Wu
(Laughs) All right. 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. But this for you started with a personal story.

Alex Scaggs
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 realised it was kind of a go-away price. Like these people did not wanna 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. It 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?

Ethan Wu
Yeah.

Alex Scaggs
And then I looked at the data and it turns out the CPI for car insurance is just risen astronomically, it seems like.

Ethan Wu
Yeah and it’s not the only kind of insurance that’s been going up recently. You know, people have been talking a lot about state firms 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: labour, litigation and Lambos. And we’ll get to the Lambos, (Alex laughs) but let’s start with labour. This is one that’ll be familiar to anyone that’s followed inflation.

Alex Scaggs
Yeah. So basically, it’s costing a lot more to repair cars. You know, the cost of labour 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 (Ethan laughs) about everyone driving terribly in 2020.

Ethan Wu
They’re just more unhinged after Covid.

Alex Scaggs
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. And 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 labour costs, like it’s, you know, the guy is actually doing the fixing.

Ethan Wu
So that’s labour, 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.

Alex Scaggs
Yeah, this was a really interesting aspect of it. It’s not that there are actually more car accidents happening. It’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 wanna 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 (Ethan laughs). Let’s not say anything else about Florida laws or government.

Ethan Wu
So Ron DeSantis, responsible for auto insurance inflation (Alex laughs).

Alex Scaggs
Oh, God. Don’t quote me on that (Ethan laughs).

Ethan Wu
So that’s litigation. And then there’s what we’ve kind of derisively called Lambos. This is like a crypto joke (Alex laughs). They’re really obsessed with Lamborghinis for some reason . . . 

Alex Scaggs
Yeah.

Ethan Wu
. . . but they’re not the only ones obsessed with cars right now.

Alex Scaggs
True. So car prices, actually used car prices . . . 

Ethan Wu
Used car prices.

Alex Scaggs
Specifically, I don’t know, maybe there are more used Lambos hitting the market after last year’s crypto market.

Ethan Wu
Right. You gotta cash out, yeah.

Alex Scaggs
Yeah. But the cost of used cars has gone up and it’s continuing to go up too, which is pretty interesting. And 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 few things is that it’s not necessarily the cost of replacing a totalled car, but more cars are getting totalled. So that also is increasing the amount that insurers have to pay out.

Ethan Wu
Right. And then if you have more expensive car, presumably, and the insurance has agreed to pay 20 per cent, 30 per cent, 40 per cent 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. But I mean, the part I don’t understand is why more cars are getting totalled. Right?

Alex Skaggs
That’s a really good (Ethan laughs) question too. You can kind of blame smart cars, I think, for this.

Ethan Wu
OK.

Alex Skaggs
Or partly. The thing is, again, this is so broad a topic and there are 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 . . . 

Ethan Wu
Ahh yeah.

Alex Skaggs
 . . . or insurers or, you know, car repairmen to just replace a part if it’s broken.

Ethan Wu
Right.

Alex Skaggs
So everything’s sort of like tougher, I guess, to replace or fix.

Ethan Wu
Yeah.

Alex Skaggs
So cars are getting totalled with less damage . . . 

Ethan Wu
Right, all right.

Alex Skaggs
Apparently.

Ethan Wu
All the cars these days are just computers on wheels.

Alex Skaggs
Yeah, exactly.

Ethan Wu
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, right, from wages and input costs. And 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, Beyoncé tickets were influencing hotel prices and that showed up in Swedish CPI. I mean, random stuff matters.

Alex Skaggs
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 stopped me in the middle of my late checkout session and be like, hey, guess what this guy pays for car insurance? (Ethan laughs) And I was like, what? And it was funny because I’d just written about it and I was like, what is going on? But it’s just, everyone talks about it, you know?

And the Beyoncé thing is amazing. I just saw the piece about headline inflation being affected by that. I’ve also found out that Taylor Swift, just her being in a city can increase hotel revenues (Ethan laughs) like really, really noticeably, which makes sense, you know, because Swifties are famously devoted. But also, like I wonder if that’s gonna 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. . . 

Ethan Wu
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 are familiar, this has been widely talked about in the past few months in kind of economics and finance discourse. And it’s this idea that in an inflationary period, companies use inflation, in a general inflationary environment, as a co-ordinating 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.

Alex Skaggs
Yeah. So the auto insurers all track their margins in great detail.

Ethan Wu
Yeah.

Alex Skaggs
Like, so Allstate, Progressive, all those guys.

Ethan Wu
Margins just being the difference between cost and price, yeah.

Alex Skaggs
Yeah, their profitability.

Ethan Wu
Right.

Alex Skaggs
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 country. So the greedflation or the greed, if it exists, isn’t there.

Ethan Wu
Yeah.

Alex Skaggs
And there are arguments you can make about the greed showing up in other places like, say, trial lawyers (Ethan laughs) in Florida or like, I don’t know.

Ethan Wu
A greedy bunch.

Alex Skaggs
Yeah, you know, I’m not one to . . . 

Ethan Wu
Please don’t email me trial lawyers.

Alex Skaggs
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.

Ethan Wu
Uh-huh.

Alex Skaggs
So apparently you can start them or some kinds you can start without keys. And this has become the Hyundai-Kia TikTok challenge.

Ethan Wu
So it’s a steal-a-car challenge.

Alex Skaggs
Steal-a-car-cha . . . Yeah, it’s on TikTok.

Ethan Wu
Great!

Alex Skaggs
For some reason.

Ethan Wu
I love that.

Alex Skaggs
And so the thing is like the car insurance executives have not been saying like, oh, this is why we’re losing money. But on the other hand, like, if your car gets stolen, insurance covers it.

Ethan Wu
Yeah.

Alex Skaggs
A lot of the time. Right?

Ethan Wu
Right.

Alex Skaggs
So I don’t know.

Ethan Wu
If Beyoncé and Taylor Swift can influence headline CPI, (Alex laughs) TikTok teens should be able to do it too.

[MUSIC PLAYING]

Ethan Wu
I don’t know if that’s a moral stand, (Alex laughs) but it seems intellectually true. Oh, man. We’ll be back in a moment with Long/Short.

[MUSIC PLAYING]

Ethan Wu
Welcome 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 gonna 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.

Alex Skaggs
Bold.

Ethan Wu
Not like Michael Burry short, where it’s all gonna collapse and you know, 2008-style. But I do think it’s gonna stay pretty frozen for a while. And we wrote about this in the Unhedged newsletter today. A lot of people are talking about a big pop in housing starts, that the bottom’s in housing. Jay Powell’s talking about this. You know I think it’s just so hard with 6 per cent mortgage rates. No one wanting to depart with their you know, locked-in 2 per cent mortgage rate, for any activity to really show up in this market. So at least in terms of the market unthawing, I’m short.

Alex Skaggs
That makes sense. It’s really interesting. I am long investor presentations from SoftBank’s CEO, Masayoshi Son.

Ethan Wu
Even bolder.

Alex Skaggs
He’s back.

Ethan Wu
He’s back.

Alex Skaggs
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’s involved in Big Tech. And you know, Masayoshi Son 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 SoftBank investor presentation and it is delightful. He says he’s shifting to offence mode (Ethan laughs). He asks what is mankind? He’s talking about the superhuman evolution of AI, happiness through technology. It’s just I miss, you know, I missed it.

[MUSIC PLAYING]

Ethan Wu
He’s back. He’s back.

Alex Skaggs
Yeah.

Ethan Wu
He’s back in good old Masa fashion. All 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 and a short. We’ll catch you then.

[MUSIC PLAYING]

Ethan Wu
Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, John Schnaars, Eric Sandler and Jess Truglia. FT premium subscribers can get the Unhedged newsletter for free, and a 90-day free trial is available to everyone else. Just go to ft.com/unhedgedoffer. I’m Ethan Wu. Thanks for listening.

[MUSIC PLAYING]