Auto insurance premiums can keep falling 4.5% as soft cycle persists

Motor-vehicle insurance prices fell 4.5% in July from a year earlier, the fastest drop since 2020, and insurers have room to keep cutting. It was the third consecutive month of year-over-year declines, a stark reversal from the double-digit rises seen from 2022 to 2025.

"There is a lot of margin to consume before companies get worried," Meyer Shields, an analyst at KBW, said. "We're not seeing repair inflation fast enough to deter companies from still aiming to grow faster."

Combined ratios in personal auto for Allstate, Hartford, Progressive and Travelers stood in the low-to-high 80% range in the second quarter, well below the 100% level that means insurers pay out more than they take in. Swiss Re Institute projects the overall US property-and-casualty combined ratio at 95% this year, up from about 94% last year, moving to just over 100% in 2027.

The declines help cool the inflation data the Federal Reserve watches, but rising repair costs could eventually reverse the cycle. Neuberger analyst Chai Gohil estimates auto rates might keep compressing for about 18 more months, barring another surge in energy or import costs.

Repair costs are the wildcard

Motor-vehicle maintenance and repair costs rose 6.6% in July from a year earlier, only a small slowdown from June's 7% jump. That inflation helped push underwriters' profits down after the pandemic, forcing them to seek big rate increases. Section 232 tariffs are weighing on the auto sector, with higher parts and equipment prices spilling into maintenance and repair, RBC economists wrote, so the rise is unlikely to be a one-off.

Claims frequency is falling

The frequency of claims has been trending downward, which supports continued rate cuts. High gas prices may be keeping people off the road, and policyholders with high deductibles may choose to pay cash rather than file a claim.

Investors are already pricing in margin compression, with the forward price-to-earnings ratios of Allstate, Progressive and Travelers averaging about 11, below the 13-plus average of the past decade. When insurer valuations climb, that may be an early sign rates are about to rise again.

This article is for informational purposes only and does not constitute investment advice.