Car Insurance Is Up 38%: How this Affects Business Vehicle Plans (2024)

Whether your business operates a fleet of company vehicles, pays a car allowance, or reimburses vehicle costs, today's sky high car insurance rates are playing a role in your budget. Here's how to adjust your business vehicle plan in response.

In just four years, from 2020 to 2024, car insurance rates have risen by 38%. The reasons are complicated, as reported by Vox: increased car accidents due to distracted driving, costlier repairs to vehicles equipped with expensive technology, and overall higher costs to replace vehicles.

With people driving more aggressivelyand using mobile devices (though texting while driving is illegal in 48 states), accidents have increased in recent years. The same timeframe has witnessed an increase in traffic fatalities, which also increases insurance claims. And with more cars than ever equipped with expensive safety technology like backup cameras and lane sensors, it is more expensive than ever to repair cars involved in crashes.

While insurance premiums are not expected to rise so dramatically now that rates have caught up with rising costs, businesses with employees who drive for work must contend with these premium increases. Let's look at how each business vehicle program is affected and how to adjust.

Fleet vehicles and rising insurance costs

Companies that provide vehicles to employees have a number of options to deal with these mounting costs from insurance rates. The higher costs of purchasing new vehicles combined with higher costs of insuring them are placing fleet operators in a particularly difficult situation. Here are a few ways to respond.

1. Use telematics to reduce insurance rates.

Many insurance companies will reduce rates for drivers who use a telematics app that records driving behavior. This accountability can feel intrusive, but it can also demonstrate to an insurer that a driver is safe and unlikely to be involved in an accident. When an organization invests in telematics, it can demonstrate on an organizational level a commitment to driver safety that will qualify for reduced rates.

2. Review your driver safety program.

If your organization can demonstrate that it has a robust driver safety program, this can help reduce rates with some insurance companies. These programs go beyond strict policies like no handheld devices to driver training programs, MVR monitoring, and interventions for drivers who demonstrate safety concerns.

3. Switch to a FAVR reimbursem*nt program.

Some organizations have found that operating a fleet is too expensive under current circ*mstances. With the costs of purchasing, maintaining, and insuring vehicles so high, it can make sense for businesses to convert some or all of the fleet to a program in which employees operate personal vehicles for which they are reimbursed. Now is a favorable time because fleet vehicles can be resold at high prices due to the demand for used vehicles.

[Read more: How to Transition from a Company Car to a FAVR Reimbursem*nt]

Car allowances: Increase with insurance rates?

If your business pays a car allowance, you may be wondering whether yours needs to increase relative to the insurance rates. The short answer is, "Yes." A car allowance should cover the business portion of employees' personal vehicle costs. Insurance constitutes a major part of these costs. People who drive as part of their jobs often accrue 5/7 or more of their total mileage from business travel.

Employee insurance coverage adds a layer of protection to the employer as well. If an underinsured employee causes an accident during work hours, the victims will seek recourse with the company's insurer. That's why requiring a minimum coverage of 250/500/100 for employees is best practice for businesses with drivers operating personal vehicles.

So what are your options for ensuring that your car allowance enables employees to purchase sufficient auto insurance?

1. Increase the car allowance amount if you haven't increased it since 2020.

Or if you have increased it since then, be aware that insurance premiums have increased by 22% since early 2023. Not only is an increase fair to the employee, but it reduces employer liability when combined with a requirement of sufficient minimum auto insurance coverage for the employee.

2. Adopt a data-based car allowance.

Most car allowances are not based on data. This means insurance rates are not taken into account. It is not unusual for insurance costs to equal or exceed fuel costs in any given year. Consider a worker who drives 15,000 miles annually in a vehicle that average 25 mpg. That's 600 gallons. If the average price is $3.50/gal, then that's an annual fuel expense of $2,100. In many states, the average annual insurance costs are over $2,000 for a middle-aged driver with a clean record.

3. Eliminate taxes on the car allowance.

Taxes eat up 30-40% of a typical car allowance. Will what's leftover be enough to cover an employee's business vehicle costs? Remember that these costs include not just fuel and insurance but also maintenance, tires, depreciation, and taxes/fees. A $600/month allowance can be easily reduced to $360 after taxes, which would barely cover the costs of fuel and insurance for the average U.S. driver.

Vehicle reimbursem*nts and full coverage of auto insurance

Both mileage reimbursem*nt at the IRS business rate and FAVR reimbursem*nt plans are non-taxable ways to cover employee vehicle costs. Both are based on data that takes into account insurance costs. So which is better equipped to address the 38% increase in auto insurance premiums over the past four years?

1. Mileage reimbursem*nts vs. insurance premiums

As long as an organization pays the IRS business mileage rate of 67 cents-per-mile or less, then all payments are considered non-taxable – as long as the employer keeps an IRS-approved log of trips and mileage amounts. But how is this mileage calculated?

The rate is calculated based on average vehicle costs for U.S. drivers. But when you consider that not all employees match the the profile ofaverage drivers, you start to see problems with this approach to reimbursem*nt. The average insurance premium last year was $1,895 for a 100/300/100 plan. But the same report found that many states were well above this amount, including Louisiana, Florida, and California at $2,883, $2,694, and $2,416, respectively.

The same goes for gas prices. Currently, the average gas price in mid-April 2024 is $3.63/gallon. But while Louisiana is well below that average at $3.18/gallon, California is well above it at $5.45. There is no way that a mileage rate based on national averages will work for a California-based driver. And the same will be true in many other states. (Plus you might be overpaying in the less expensive states.)

2. FAVR vehicle plans vs. auto insurance increases

Fixed and variable rate car allowances (aka FAVR reimbursem*nt plans) are another IRS-recommended way to reimburse business-vehicle expenses tax-free. FAVR allowances are based on much more precise algorithms, leading to more accurate, cost-effective reimbursem*nts.

This is why FAVR plans are considered best practice for businesses that want to ensure that their car allowance or reimbursem*nt covers business vehicle costs. When operated properly, a FAVR plan provides assurance to employees that the reimbursem*nt will increase when costs increase while protecting the employer from ever overpaying.

This is because each driver's reimbursem*nt rate is calculated using localized vehicle costs that specifically target every single category of vehicle expense, including insurance, fuel, maintenance, and the other costs referenced above.

Conclusion: Budget for Auto Insurance Premiums

It is important to make sure your operations budget takes into account the high auto insurance rates your mobile workers face. Whether you operate a fleet of company cars, pay a car allowance, reimburse mileage, or pay a FAVR reimbursem*nt, that 38% increase will affect your drivers and/or vehicles.

To learn more about FAVR plans that automatically factor insurance into the rate, try comparing one of plans with your current program.