AAA’s 2010 Your Driving Costs study found that the average cost to own and operate a sedan rose by 4.8 percent to $8,487 per year, compared with the previous year. Rising fuel, tire and insurance costs contributed to the increase, with the average cost of auto insurance on sedans rising by 5.7 percent to $1,031 for a typical policy including collision and comprehensive coverage. The 2010 study is based on costs associated with five top-selling 2009 models selected by AAA.  Figures are not comparable to the National Association of Insurance Commissioner’s Auto Expenditures data shown below.

The average cost of automobile insurance declined by 2.6 percent in 2007, according to a December 2009 report from the National Association of Insurance Commissioners (NAIC). The District of Columbia had the highest average expenditure ($1,140), followed by New Jersey ($1,104), Louisiana ($1,096), New York ($1,047) and Florida ($1,043).

AUTO INSURANCE EXPENDITURES, BY STATE

The table on the following pages shows estimated average expenditures for private passenger automobile insurance by state for 2003 to 2007, providing approximate measures of the relative cost of automobile insurance to consumers in each state. To calculate average expenditures the National Association of Insurance Commissioners assumes that all insured vehicles carry liability coverage but not necessarily collision or comprehensive coverage. The average expenditure measures what consumers actually spend for insurance on each vehicle. It does not equal the sum of liability, collision and comprehensive expenditures because not all policyholders purchase all three coverages.

Expenditures are affected by the coverages purchased as well as other factors. In states where the economy is healthy, people are more likely to purchase new cars. Since new car owners are more likely to purchase physical damage coverages, these states will have a higher average expenditure. The NAIC notes that urban population, traffic density and per capita income have a significant impact on premiums. The latest report shows that high premium states tend also to be highly urban, with higher wage and price levels and greater traffic density. Tort liability and other auto laws, labor costs, liability coverage requirements, theft rates and other factors can also affect auto insurance prices.

WHERE THE PREMIUM DOLLAR GOES, PRIVATE PASSENGER AUTO INSURANCE, 2008 PREMIUMS EARNED:     $100 CLAIMS:       Payments to injured persons:       Medical $9     Wage loss and other economic payments 2     Pain and suffering and other noneconomic awards 6     Lawyers’ fees 11     Costs of settling claims 2         Subtotal   $30           Payments for damage to cars (1):       Property damage liability $17     Collision claims 17     Comprehensive claims 7     Costs of settling claims 1          Subtotal   $42   Total claims   $72           EXPENSES:       Commissions and other selling expenses $18     General expenses (costs of company operations) 5     State premium taxes, licenses and fees 2     Dividends to policyholders 1     Total expenses   $26           Claims and expense total     $98         BOTTOM LINE:       Investment gain (2)     $5 Pretax income ($100-$98+$5)     7 Tax     -2 Income after taxes     $5 (1) Includes theft and damage to other property, e.g., road signs. (2) Includes interest, dividends, and realized capital gains. Source: Insurance Information Institute estimate based on data from ISO; National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data, LLC. Copyrighted information. No portion of this work may be copied or redistributed without the express written permission of Highline Data, LLC.; Insurance Research Council.

In 2008 claims accounted for $72 of every $100 earned in private passenger auto insurance premiums in the United States. Lawyers’ fees accounted for $11 out of every $100 in premiums. Half of the fees went to plaintiffs’ attorneys and the remainder to defendants’ attorneys. Theft accounted for about 25 percent of the dollars that go to pay comprehensive claims, or slightly less than 2 percent of premiums earned for private passenger auto insurance. WHERE THE REVENUE DOLLAR GOES, 2008 (Premiums and investments)

THE SHARED/RESIDUAL MARKET AND NONSTANDARD MARKETS

All states and the District of Columbia use special systems to guarantee that auto insurance is available to those who cannot obtain it in the private market. Each type of system is commonly known as an assigned risk plan, although that term technically applies to only one type of plan. The assigned risk and other plans are known in the insurance industry as the shared, or residual, market. Policyholders in assigned risk plans are assigned to various insurance companies doing business in the state. In the voluntary, or regular, market, auto insurers are free to select policyholders.

The percentage of vehicles insured in the shared market is dropping, in part because of the evolution of the nonstandard sector of the voluntary market. The nonstandard market is a niche market for drivers who have a worse than average driving record or drive specialized cars such as high-powered sports cars and custom-built cars. It is made up of both small specialty companies, whose only business is the nonstandard market, and well-known auto insurance companies with nonstandard divisions.

Until the mid-1960s, most drivers who did not meet an insurance company’s “standard” or “preferred risk” underwriting criteria could only find coverage in the shared market, where prices are generally much higher and insurers pool or share the profits and losses. With advancements in computer technology that made it easier to set appropriate prices for smaller and smaller risk categories, some insurers began to specialize in insuring drivers with marginally bad driving records. By the late 1990s the nonstandard market accounted for about one-fifth of the total private passenger auto insurance market. This has held steady.  A 2008 Conning study found that in 2006 auto insurers specializing in nonstandard private passenger auto insurance had direct premiums written of $36.9 billion, representing 22 percent of the total private passenger auto insurance market.

COLLISION LOSSES

The chart below shows the claim frequency, average loss payment per claim and average loss payment per insured vehicle year under collision coverage for recent model vehicles. The last item factors in both claim frequency and the average loss payment per claim. This combination is a measurement of overall insurance losses.

The claim frequency is expressed as a rate per 100 insured vehicle years. A vehicle year is equal to 365 days of insurance coverage for a single vehicle.

CONSUMER PRICES

The Bureau of Labor Statistics's consumer price index (CPI) tracks changes in the prices paid by consumers for a representative "basket" of goods and services. The index shows that the cost of living (all items) fell from 2008 to 2009, the first decrease since 1955, but the cost of auto insurance, and related items, such as healthcare and legal services increased.