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As auto insurance prices rise and the threat of Trump's tariffs hang overhead, we're taking a closer look at what this means for drivers with Bloomberg Intelligence senior analyst, Matt Palazzola. Matt, great to see you in studio.

Thanks.

Let me let's get right to this data. So CPI data shows vehicle insurance, Matt, I want to get this right, jumped 2% in January and has soared economists pointing out at double digit rates since September 2022. What is driving that, Matt?

Yeah. So what happened, Josh, was, in Covid, you saw automakers, auto parts makers actually cut their orders of like semiconductors and things like that. So it really disrupted the supply chain for auto parts. Okay. So auto parts got a lot more expensive. During Covid, a lot of people stopped driving, so auto prices actually went down a little bit, auto insurance prices. So these companies tried to gain market share, they lowered prices. Then what happened is parts spiked up. So the average cost of an accident went a lot higher. A lot of these companies got caught flat footed, so they had to raise prices dramatically to catch up with it. So that's what you're seeing. And actually, you're seeing that kind of tail off now. So the the rise in parts prices has kind of tailed off. So the profitability of auto insurers has come back. So you're actually seeing the price increases kind of decrease in frequency.

I've also read, Matt, that people are getting in more car accidents and that's a variable. Is that accurate?

So, I would say what has happened is safety and cars has actually decreased accidents, right? What happened during COVID was there were higher accidents, higher severity of accidents. So people were getting in faster accidents. The the price of the materials, as we were talking about, got a lot higher. So the frequency actually has gone down a little bit, but the severity of the accidents went up, which means the cost to auto insurance companies goes up.

What about tariffs, Matt, possible tariffs? What is possible ripple effects for vehicle insurance?

So we did some ground up and some kind of top down looks at this, what this would mean for auto insurance.

It has to be tough to model, Matt, because duration, level of tariffs, right?

Oh, for for sure. I mean, the numbers we came up with are very rough. But we said about a 15% earnings hit to some of the big public insurance companies that specialize in auto insurance. We looked at about, so 55% of imported auto parts come from Mexico and Canada. Then parts come in and out, cars go. So, you know, we did our best to assume how much of repair costs would be impacted. Uh, we did that. We said about half the losses come from the damage to the cars. Half of those losses then are parts versus labor. And then we try to look at the pieces of those that were impacted by the tariffs. And all that netted out to about 15% earnings downside, should we see those tariffs for an entire year.

Were there certain companies that were better positioned than others?

Yes. So Allstate and Progressive are the two companies with the biggest exposure to auto insurance. So the two biggest public companies with exposure. Others have it, but not as a big percent of their business mix. Out of the two of those, we think Allstate's better, uh, I'm sorry, we think Progressive is better positioned. They have dealt with this environment better than all the other companies. They're kind of more adroit in their pricing, their profitability came back sooner than other ones, they're gaining market share. So we think even in a troubled environment, they're probably the one that would navigate it better.

Let me ask you this, the average annual premium for full auto insurance in the US. What is it now, Matt? What do you see it 12 months from now?

So, I don't I don't have an exact number because it's a very different state by state. Uh, it went up. I mean, you're probably looking at 12 months, you're probably looking over $1,000 just kind of nationwide, maybe 1,200, something like that. I think what is going to happen, should these tariffs not come into effect, you're probably going to see some price competition, probably in the second half of 2025. What these companies typically do is compete away excess profits. And they are in that position actually right now. Their underwriting is better than it was before COVID because of those price increases we talked about. They cut a lot of advertising and that is now coming back. So I think you're going to see the price competition come back in the second half of the year. So don't kill me in the comments, but I do think, uh, you may see auto insurance come down a little bit in the second half of this year.

That's good news. I've always wondered this, Matt. Does everybody pay the same? Like if I live, if I'm next to my neighbor and we have the same vehicle type. Let's say we have roughly the same driving record. We're both good, we're responsible, not texting while we drive. Is it basically the same, or no other variables come into play, too?

Glad you're not texting while you drive. Um, yes. Generally yes. What is coming to play is something called telematics, right? So companies are trying to get you to use either an app on your phone or something you plug into your car and that will determine a couple of things about how you drive. Should you have that, you and your neighbor, even if you are the same demographic, same car, same everything, your rates could be dramatically different. So the old way of pricing has generally been, let's look at all these demographics of the person, of the car, etc. The newer way of doing it is, let's look at actually how they drive, this driving data. And not a lot of policies are on that. Some startup companies, all of their policies are like that. But with these big legacy companies, you're talking about maybe 10, 15% are on the telematics kind of pricing basis. But should it be that way, that is kind of the best way for you and it's the best way for insurance companies.

Super interesting conversation. Impacts a lot of people, Matt. Thanks for joining us. Appreciate it.

Pleasure.