In two weeks, State Farm’s auto insurance customers in Illinois will see their rates go up again – for the fourth time in less than a year. Together they’ve raised the average cost about $200.
Many of State Farm’s competitors are also raising rates. And that’s led to some whiplash for customers who saw refunds and rate cuts during the pandemic, as people drove less, crashed less, and submitted fewer claims. And it’s helped stoke interest among lawmakers in Illinois in tightening control of how and when companies can raise rates.
Bloomington-based State Farm’s rapid-fire rate increases should be put in the context of its 2022 financial performance, when it took a record $13.2 billion in underwriting losses, said Yayuan Ren, associate professor of risk management and insurance at Illinois State University. Auto was the big drag, and it makes up about 61% of State Farm’s insurance business.
“It’s unprecedented. State Farm’s policy is severely underpriced. They have to raise premium rates to rectify the situation,” Ren said on WGLT’s Sound Ideas.
State Farm’s latest increase in Illinois will raise auto rates, on average, 6% (or about $56 annually), starting June 5, according to filings with the Illinois Department of Insurance. A 6.5% increase just went into effect March 13, following two increases (8.4% and 2.9%) in 2022.
“Inflationary pressures and supply chain issues, along with higher claim costs, are driving rate changes,” a State Farm spokesperson said. “We continue to adjust to these trends to make sure we are matching price to risk.”
Those factors, of course, trace back to the pandemic. The current rate increases came after State Farm cut auto rates, on average, 11% at the start of the pandemic and also returned about $2 billion in dividends to customers.
“They start from a relatively low premium rate in 2020, then the big loss came in 2021 and 2022. That’s why we see a big jump in car rate,” Ren said.
And insurance companies industrywide are indeed seeing higher severity auto claims, Ren said. Researchers are still exploring why, but there’s evidence that driving habits changed during the pandemic – when some people got accustomed to driving faster on emptier roads.
“People are still driving at elevated speeds compared with the years prior to the pandemic. So the higher speed leads to more severe car accidents. So the severity of the car accidents is higher,” Ren said.
Auto-repair costs are rising, driven in part by more newer vehicles having enhanced safety features like cameras and sensors that are more expensive to repair. A smashed rear fender that might have cost $800 to fix at an auto shop might now be a $2,000 repair at a dealership that needs to re-install the camera, sensors and adjust and test the corresponding software, Ren said.
“And it’s not just inflation. It’s supply-chain challenges. It’s often taking longer waiting for an auto part. And there are limited qualified laborers to repair cars. So, it’s taking longer to repair cars, and it costs more,” Ren said.
Changes to Illinois insurance regulation?
Insurance is a tightly regulated business, largely at the state level. For rate hikes, Illinois’ primary regulatory agency – the Illinois Department of Insurance – doesn’t have much power. Insurers are required to notify the state about rate increases, but they don’t require approval.
That could change. A bill pending in Springfield, HB 2203, would tighten regulation on insurers on two fronts – by prohibiting the use of potentially discriminatory factors when setting rates, and providing a more robust review of proposed rate increases, as is common in other states.
The insurance industry opposes the bill. When the bill came up for a hearing earlier this month, industry trade groups called it “bad public policy” that will “harm consumers by reducing competition, increasing litigation and likely driving-up insurance rates for Illinois drivers.”
The bill’s supporters ran out of time this spring to bring it to a vote, so they’ll try again in a future session, said one of its sponsors, Democratic state Rep. Will Guzzardi from Chicago. He said he’s working to educate his colleagues about the “discriminatory non-driving factors that are being used in setting car insurance rates.” The bill would prohibit the use of factors like a person’s credit score, prior insurance coverage (or lack thereof), education level, age, or occupation.
Guzzardi said auto insurance is unique because it’s a product every driver is required to have, which distorts the marketplace. The government needs to regulate that market to ensure that it’s fair, so that the “brunt of rate increases in our state aren’t borne by the people who are least able to afford them.” Some sort of rate review or oversight is needed, Guzzardi said.
“We just don’t think that’s fair,” Guzzardi said. “We know rates are going way up. What we don’t know is if that correlates to costs going up for companies. There’s no transparency, no oversight. That’s what we’re asking for with this bill.”
State Farm is Bloomington-Normal's largest employer, with over 13,000 employees. The company remains the largest home and auto insurer in the U.S.
