Motoring costs driving upwards

Moving into the second quarter of 2024, governments around the world were heralding lower rates of inflation, as energy prices fell and higher interest rates curbed discretionary spending, helping to slow wage increases. However, motorists in numerous countries continued to feel the pinch of higher car prices and other running costs. Recent months have seen headlines concerning above-inflation rises in the cost of cars and, most notably, car insurance. In many cases, the dramatic price rises for motoring have their roots in the pandemic.

Driving out of the pandemic

Car manufacturing slowed severely during the pandemic, with demand at all-time lows in 2020 and 2021 due to Covid lockdowns around the world. As countries began to emerge from pandemic restrictions and motorists began driving again, the car market was heavily undersupplied with new vehicles as manufacturers gradually scaled their production back upwards. Car makers have been slow to return to pre-pandemic levels of production, due in no small part to global shortages of microchips – an essential component of modern cars. These microchip shortages led to car manufacturing becoming more expensive, alongside post-pandemic inflation driving up the cost of raw materials for new vehicles. The car industry also suffered from supply chain issues, with shipping delays meaning motorists faced a perfect storm of low availability of cars that were already more expensive to build.

ECA’s Transport Reports have shown an acceleration of price increases for new cars over the past few years. In 2021 global average car prices were almost unchanged from the previous year as demand plummeted. However, annual increases have become larger in every year since, with our 2023 survey showing average price growth of 5% and our latest survey showing increases of almost 8%. The fact that car prices continue to accelerate upwards while headline inflation rates eased in 2023 suggests that motorists are likely to face higher costs for some time yet.  

Selected changes in car prices and insurance costs in year to March 2024

Why is insuring a car so expensive now?

As car prices increase, insurance premiums typically follow, as the underlying value of the item being insured becomes more expensive. However, insurance rises in many countries are outstripping car price growth, which suggests more factors are in play. Indeed, new-car prices are only one of many factors driving up insurance costs.

The high-inflationary environment of the past couple of years has contributed to high wages, and increased labour costs make car repairs more expensive. Ongoing advances in car technology and safety features mean that even minor scrapes take longer and cost more to fix in repair shops. Mechanics are also dealing with shortages of spare parts, a hangover from the pandemic slowdown in the car manufacturing industry. Multiple insurance companies have complained of manufacturers flooding markets with new cars without also delivering an adequate supply of spare parts, which delays repairs and adds to their costs.

Outside of repair costs, many insurers claim they are suffering from high levels of car theft, with stretched police forces deprioritising ‘non-violent’ crimes such as these. With stolen vehicles lost from the market it is more difficult for insurers to provide courtesy cars to drivers whose cars are in the repair shop.

Insurers say they have held back on price increases in recent years, mindful of the impact of cost of living increases impacting drivers’ purchasing power in other areas. They are now making up some of those shortfalls and in many countries we saw staggering increases in the cost of car insurance between 2023 and 2024. Insurance premiums on popular car models in the US are up over 40% annually, while the UK is seeing increases of 50% or more for some vehicles.

What about electric cars?

While electric car uptake is increasing globally, the cost of maintaining those cars is becoming more and more expensive. Many of the factors affecting insurance premiums for internal combustion cars are more pronounced for their electric counterparts. One of the main extenuating factors is linked to car batteries. The battery is the most expensive part of an electric car and battery faults tend to take long times to fix as safety dictates that the faulty battery is fully drained of charge before being mended. More time in the repair shop means more costly repairs. On top of this, spare parts shortages are more prevalent for electric cars, leading to higher costs that insurers need to factor into their underwriting.

What does this mean for my assignees’ car allowances?

ECA’s car allowances provide reliable estimates for the cost of providing company cars to employees while on assignment. Car leasing companies tend to factor in new car prices, insurance costs and other running costs when setting their prices. Higher car prices and insurance premiums for drivers inevitably mean that companies will need to prepare for higher allowances for the use of cars while on assignment.

Another cost to consider is that of fuel, which factors into car leasing calculations. While electric car running costs will depend on prevailing electricity prices, which are showing signs of calming, petrol and diesel prices are on the up. Red Sea attacks by Houthi rebels are affecting oil tanker routes, as are global refinery closures.

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