Why frozen insurance rates may not pay off for California drivers

California has refused to allow auto insurance rate increases since the start of the pandemic. Could it backfire?

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Myles Ma, CPFCSenior ReporterMyles Ma, CPFC, is a certified personal finance counselor and former senior reporter at Policygenius, where he covered insurance and personal finance. His expertise has been featured in The Washington Post, PBS, CNBC, CBS News, USA Today, HuffPost, Salon, Inc. Magazine, MarketWatch, and elsewhere.

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California has refused to allow auto insurance rate increases since the start of the coronavirus pandemic. It may sound like a sweet deal for drivers, but insurance companies and experts in the state say holding down rates will have negative long-term consequences.

“There’s going to be a coiled spring of some kind,” says David Russell, professor of insurance and finance and co-director of the Center for Risk Management and Insurance at California State University Northridge.

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Why can’t California auto insurance companies raise rates?

It’s a little bit like a referee giving a makeup call. California Insurance Commissioner Ricardo Lara, who is up for re-election in November, says consumers were overcharged during the early months of the pandemic, when they had all but stopped driving but were still paying auto insurance premiums. A court ruled last year that Lara can’t issue retroactive refunds. Instead, he’s refused to approve any insurance rate increases to make up for the “inflated” premiums he says drivers paid during the pandemic. [1] (The California Department of Insurance did not return emails seeking comment.)

What will happen if auto insurance companies can’t raise rates?

Just like workers won’t show up if a job doesn’t pay enough, insurance companies will be less willing to sell policies if they can’t charge enough, Russell says. 

“If you can’t charge enough, you’re going to be unenthusiastic at best about accepting risks at that price,” he says.

That means insurance companies may be more choosy about who they cover or will withdraw from the market entirely. Industry associations have warned that Lara was risking a crisis.

“There is an obvious, and avoidable, market crisis looming,” says a letter from the National Association of Mutual Insurance Companies, the Personal Insurance Federation of California, and the American Property Casualty Insurance Association.

Denni Ritter, vice president for state government relations for the APCIA, says the cost of insuring drivers has increased significantly, while rates have stayed the same for the majority of drivers.

“There has been a dramatic increase in the cost of new and used cars, replacement parts, and the severity of accidents, coupled with supply chain imbalances and inflation driving up the cost of claims,” she says. “The commissioner’s inaction threatens the solvency of insurance providers and is already restricting consumer access to auto coverage options.”

In the short-term, insurance companies may raise prices for other products, like homeowners insurance, cut back on marketing, or stop replacing agents when they retire. 

Drivers shouldn’t get used to the rate freezes, Russell says.

“You should prepare for significant rate increases sooner or later,” he says. 

If and when that happens, there are a few steps you can take to make sure you get the lowest rates on your auto insurance:

  1. Compare insurance quotes from different companies: This way you can get the most affordable option, since not every company may raise rates to the same levels.

  2. Bundle with home insurance: Most car insurance companies also sell home insurance, and you can usually get a discount if you buy auto and home insurance from the same company.

  3. See if you qualify for a discount: Drivers can often earn savings because of their driving, their personal characteristics, their vehicle, or their policy. Check out our guide to discounts here.

Image: Mark Leary / Getty