Higher Insurance Costs Erode Fuel Savings on Small Cars

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This year's higher gasoline prices are prompting drivers to switch to smaller, more fuel-efficient cars. The trouble is, some of the money they save may be going to higher insurance premiums.

Small cars generally cost more to insure than larger ones because they're involved in more accidents and incur bigger claims, especially for injuries. That's true regardless of the driver profile, though younger and less-experienced drivers tend to buy smaller, cheaper cars.

A 40-year-old male driver would pay an average of $1,704 to insure a 2009 Mini Cooper that gets 37 miles per gallon on the highway, according to a study by Insure.com, an online insurance broker. That same driver would pay only $1,266 -- a difference of $438 -- to insure a Toyota Sienna Minivan, which gets 23 mpg.

Similarly, a Honda Civic compact that gets 36 mpg on the highway costs $412 more a year to insure than a Honda CR-V, a small sport-utility vehicle that gets 27 mpg.

"There is always a safety trade-off when you move from a large, heavy vehicle to a smaller, lighter one," says Russ Rader, a spokesman for the Insurance Institute for Highway Safety, a nonprofit industry-funded group.

Your insurance premium is based in part on the history of your particular model, and small cars often cost less for property-damage liability coverage because they're less likely to damage other cars, says Mr. Rader. But lower property-damage liability costs for small cars are more than offset by most other coverage components, especially personal-injury protection for car occupants.

Small cars also tend to have higher theft rates, and some are used more often in street racing, both of which add to insurance costs. Four of the top 10 most-stolen vehicles in the U.S. are compact cars, according to the National Insurance Crime Bureau, a nonprofit organization funded by property-casualty insurers, including 1990s-era Honda Civics and Accords. (See www.nicb.org for a list of the most-stolen vehicles.)

Insurance companies evaluate risk differently, using such factors as driving history, household composition, the neighborhood where the car is parked, credit-based insurance scores and sometimes even education levels. A growing number of insurers are tailoring premiums to the driver using proprietary formulas, instead of lumping them into broad risk-categories. That means that the price you pay to insure a specific make and model can be much more or less than what your friends pay to drive the same car.

Nationally, auto premiums overall have risen at an annual rate of about 3% in 2008, according to the Insurance Information Institute, citing federal government statistics.

After soaring earlier this year, retail gasoline prices have lately been tumbling, making the higher insurance costs for smaller cars even more of a consideration. Alternative-fuel vehicles in general are even more expensive to insure, though several insurers offer discounts for hybrids. In this case, the main culprit is higher repair costs.

The 2009 Camry hybrid, for instance, costs an average $1,957 to insure for that 40-year-old male driver, while a similar conventional 2009 Camry costs just $1,302, according to Insure.com.

A recent study by the Highway Loss Data Institute, an affiliate of the IIHS, found that overall insurance costs for crash damage were higher for 11 of 12 hybrid cars and SUVs than for their gas-only counterparts.

"Hybrid cars cost more to insure because they can't [always] use after-market parts, the labor charges per hour are higher, and the they take longer to repair," says Amy Danise, a spokeswoman for Insure.com.

Some early buyers of the new microcars say they initially had trouble even finding insurance. Michelle Rupp, a 50-year-old insurance broker in Seattle, says she initially wasn't able to find an ordinary auto policy for the Smart car she bought in 2006. The tiny three-cylinder cars are produced by Mercedes-Benz, a unit of Daimler AG. Instead, she had to buy a commercial policy from a small regional insurer.

"Nobody knew what they were and they [insurance companies] were really freaked out," Ms. Rupp says. Since then, companies such as Safeco Corp., recently acquired by LibertyMutual Insurance Co.; Geico, a subsidiary of Berkshire Hathaway Inc.; Travelers Cos. Inc. and Progressive Insurance Co. have started writing policies for the tiny cars. LibertyMutual provides discounts for them.

Smart USA spokesman Ken Kettenbeil says that earlier versions of the Smartfortwo car imported into this country prior to January 2008 didn't meet U.S. crash and emissions standards. He says most insurance companies now offer policies for the cars.