Alabama – 52.8% increase in insurance rates in two decades

Alabama is 12th on the list of the most expensive states to buy auto insurance in the United States.  The average auto insurance rate in Alabama is $1667. Over the past two decades, drivers in Alabama have had to spend more than 50% more on auto insurance than they did before.  In 1989, the average annual auto insurance rate was $426.30. This has increased to $651.24 in 2010, which is a 52.8% increase. The national auto insurance average expenditure in 2010 is $791.22.

Let us consider the factors that led to this increase in the auto insurance rates –

State regulations –

The state of Alabama follows the PA (Prior Approval) regulatory law. The PA system requires that insurers apply for rate changes before they are implemented in the market. The average change in insurance rates is 48% for states that follow the PA regulatory system. In Alabama the rate is 52.8% (change from 1989 to 2010). The states which have adopted the PA system saw less change when compared with other states such as Louisiana where insurance rates increased by 96.1%.

Motor vehicle theft rate –

Auto insurance rates increase in areas where auto theft rates are high. In Alabama, 3796 motor vehicles were stolen in 2011. The highest number of thefts in Alabama was reported in Birmingham in 2011, with 1513 instances of motor vehicle theft.

Percentage of uninsured drivers –

In Alabama, 21.8% of the drivers are uninsured. The percentage of uninsured drivers is higher only in five other states. In spite of the fact that Alabama has strict laws that forbid driving without auto insurance, a significant percentage of the population is uninsured. The state revenue department has introduced a new system since Jan 1, 2013 to crack down on uninsured drivers. The system will verify in seconds whether a motorist is following the state insurance laws.

Competition intensity –

Usually, the Herfindahl-Hirshman Index (HHI) is used to measure competitiveness in a market, which calculates market concentration. The higher the HHI, the lower is the competition in the market. The U.S. Department of Justice considers a market with a score of less than 1,000 to be a competitive marketplace, while a score between 1,000 and 1,800 is a moderately concentrated marketplace. A score of 1,800 or above indicates a highly concentrated marketplace.

Alabama’s HHI is 1163, which means that it falls in the moderately concentrated category.