Elevated interest rates, affordability woes and the potential for a looming recession have dealers facing a heap of profitability pressures. Although we saw a rise in profits during the COVID-19 pandemic, gross is declining. Savvy dealers know it’s not just the monthly car payments that have customers in a bind; it’s the total cost of car ownership.
That’s why the anticipated upswing of the auto insurance market in 2024 — and lower insurance rates that come along with it — should have dealers celebrating. Right now, only a fraction of dealers are paying attention. It’s time for all dealers to recognize that this is a huge opportunity to bolster declining margins.
But a little background first. Inflation wrecked the auto insurance market in 2023. The degree and quickness of the rise in inflation caught insurance carriers by surprise. As the cost of repairs from accidents shot up, insurance providers worked to raise their rates to maintain their historical 3 to 5% net margins.
Insurance is regulated at the state level, so rate changes don’t happen quickly. Carriers must get increases blessed by each state’s Department of Insurance. This process takes time. In the interim, carriers lost money on new business that was underpriced, leading many to shut off new business altogether. They stopped new policy sales and focused on retaining existing customers and cutting costs to hit their desired margins.
This reduced insurance options for car buyers, who then, in many cases, had only a few insurance brands to choose from. Thankfully, toward the end of 2023 most insurance brands began to make it through the cycle of rate updates and are slowly opening sales up again.
The recover won’t be immediate, but we believe we will start to see improvement in the first quarter of this year. Over the course of the year, we’ll continue to see more carriers welcome new customers, on a state-by-state basis. This means more choices for car buyers, and more potential for insurance savings when shopping around.
That’s a good thing for both the car buyer and the dealer, because it can create more space in the customer’s budget for their new car. We’ve seen customers save an average of $75 per month ($900 per year) on their auto insurance*, a meaningful savings to most car buyers. It can help them get into the car they want or even leave a bit more room in their budget for F&I products.
In our 2024 study on embedded auto insurance trends, we uncovered hard data on just how important the total cost (including insurance) is in the car buyer’s overall decision process. Which brings me to the number one reason why dealers should care that the insurance recovery is on its way: because it matters to your customers and has a measurable effect on their budget. The opportunity will only grow in 2024 as the insurance market recovers.
Margin compression is a perennial topic, as is finding new sources of income. Insurance transactions are already happening with 100% of car purchases, whether dealers are involved or not. For the customer, the car deal includes insurance. Most dealers aren’t yet benefitting, but they could, and they should, in 2024.
*Polly customer reported savings during 2023
