If you have not updated your vehicle allowance or reimbursement plan in the last two or three years, your plan has probably not kept up with inflation. Here are some ways to tell.

3 Signs Your Vehicle Allowance Has Not Kept Up with Inflation

If it has been awhile since your organization reviewed and updated its vehicle allowance policy or vehicle reimbursement, then it's time to face it: your policy is not keeping up with inflation. Even if you have made changes recently, now is still a good time to make sure your policy still works for your employees.

Here are the top three ways to tell that your auto allowance policy has not kept up with inflation:

1. You have not changed your vehicle reimbursement policy in the last three years.

A lot has happened since the end of 2020. COVID-19, supply chain challenges, wars, and global over/underproduction of fuel and vehicles. Inflation has been caused by a combination of factors, and vehicle costs have not been spared.

Not only did auto insurance premiums increase from 2022 to 2023 by an average of 19%, but further expected insurance cost increases for 2024 are the latest in a long list of cost increases your mobile employees face. The fact is that many organizations still have the same car allowance that they did almost ten years ago.

2. You updated your vehicle allowance but didn’t use data or methodology to calculate the rates.

Updates to vehicle allowance policies that are not based on data tend to be more reactive than proactive. Without using vehicle expense data to calculate an allowance or reimbursement rate, you are likely to exacerbate existing problems rather than solve them. 

Not all expense categories change at the same rate. As the prices of vehicles have skyrocketed over the past three years, the rate of depreciation – an expense a vehicle allowance should cover – has actually decreased. At the same time, insurance premiums and the costs of maintenance have risen significantly. How should these changes factor into your allowance amount?

Different employees experience different levels of expense, depending on where they work and how much they drive. An employee based in the Northeast urban corridor will experience higher costs than an employee in the rural Midwest. An employee in California may experience the highest costs of all. To pay an equitable allowance, you need vehicle expense data.

3. Your vehicle allowance policy doesn’t scale with short-term inflation.

Let’s face it: estimating fuel costs has gone out of the window. Fuel costs are not as predictable as they were in previous years. Historically, fuel costs would rise in the summer, taper down in the fall, pick back up for the holidays, and traditionally be at their lowest during the winter. Now, it’s hard to predict. When fuel prices rise but car allowances do not, employees may drive less to save.

For insurance costs, employees will work to manage their expenses by reducing their premiums and scaling down their coverage. Reduced coverage could create a risk manager's nightmare for your company – getting your company involved in at-fault accidents during work hours. 

If, however, you build some flexibility in your program to track with fuel and insurance costs as they change, you can protect the organization from the negative impacts on employees. Employees will not take counterproductive measures like reducing travel or reducing insurance coverage.

How to inflation-proof your vehicle allowance

Whether the economy is experiencing inflation or deflation, you need a vehicle allowance policy that works for both the organization and its employees. The key is to build into your rate development model a data-based responsiveness to fluctuations and variations in vehicle expenses.

By baking into your policy this flexibility up front, you prevent reactive decisions that are essentially shooting into the dark. It can be time consuming to develop a methodology that accurately tracks expenses for employees based in different parts of the country. But it will be worth it in the long-term.

For advice on how to develop an inflation-proof vehicle allowance, contact mBurse Professional Services. We can even develop and administer your rate and program for you.