Consumer Group: Pricing Values Income, Education over Crash Record

The use of nondriving-related factors in rating drivers is especially costly to low- and moderate-income motorists, who often see higher costs for coverage even if they have a better driving record than richer, more educated counterparts, according to the latest report on auto insurance pricing from the Consumer Federation of America (CFA).

The study, which covered 60 insurance quote pairings gathered from the nation’s five largest insurers across 12 cities, used two sample profiles that shared some characteristics but differed socioeconomically.

Both were 30-year-old women living on the same street, seeking the same minimum liability requirements and had driven the same model car for 10 years. However:
–One was single with a high school education, rented her residence, lacked coverage for the past 45 days, was employed as a receptionist and had a clean driving record.
–The other was married woman with a master’s degree, lived in a home she owned, had no gap in coverage, was employed as an executive and was at-fault for an accident within the past three years that caused $800 in damage

According to the CFA’s quote comparison between the two profiles, the woman who was a safer driver was quoted a higher premium than her counterpart about 66 percent of the time.

That safer driver was also often quoted steeply higher prices; the price tag was bigger by at least 25 percent in about 60 percent of the cases where that safer driver was quoted pricier coverage.

J. Robert Hunter, director of insurance for the CFA, said the profiles’ differing socioeconomic characteristics show that poorer, less educated drivers fall victim to unfair pricing formulas used in the industry.

“State insurance regulators should require auto insurers to explain why they believe factors such as education and income are better predictors of losses than are at-fault accidents,” Hunter said in a statement. “Policymakers should ask why auto insurers are permitted to discriminate on the basis of nondriving-related factors such as occupation or education.”

Insurers Contend that Competitive Marketplace Offers Options

Countering the case made by consumer advocates, insurance industry experts said that the highly competitive marketplace provides affordable options to customers.

The industry uses a litany of factors to rate their customers, and insurers use nondriving-related factors to further shed light on the chance that a consumer will crash and/or file a claim, according to the Insurance Information Institute (III), which responded directly to the CFA study.

“As anyone who watches television commercials knows, auto insurance coverage is widely available in every U.S. state,” Steven Weisbart, the III’s chief economist, said in a statement. “And competitive marketplaces drive down prices. Drivers should shop around if they feel as though their current auto insurer is not meeting their needs, or is charging too high a price.”

The III has stood firm in its support of how insurance carriers use rating factors, a practice that the CFA has long attacked as skewed against poorer drivers.

The CFA published a similar study this past summer showing auto coverage rates were “neither fair nor affordable” for moderate-income drivers.

In another auto insurance-related report, released last January, the CFA recommended that regulators narrow the set of factors used in pricing to alleviate the burden of high costs for lower-income motorists.

The III said that limiting rating factors would “only distort prices.” The Property Casualty Insurers Association of America (PCI) said the recommendation amounted to “overregulation” based on a “flawed impression.”

“Overly restrictive laws and regulations have been shown time and again to reduce consumer choice and inhibit market innovations,” Paul Blume, a senior vice president with PCI, said in a statement.

CFA Says Low-Cost Options Vital to Robust Marketplace

The CFA’s latest study found that only about 6.5 percent of the cases showed annual premiums under $500: two of them in Cleveland (from GEICO and State Farm); one from State Farm in Chicago; and one from State Farm in Phoenix.

The study found quotes exceeding $1,000 in 25 of the 60 pairings, or almost 42 percent of the time.

Moderate- and low-income drivers often resort to skipping auto coverage altogether because of high prices and a lack of low-cost options, said the CFA, which added that minimum liability coverage options costing in the range of $300 and$500 would be affordable to such drivers.

But such prices are scarce nationwide, according to Hunter.

“A fairly high percentage of low- and moderate-income drivers cannot afford to purchase auto insurance, which is why so many risk breaking the law and getting stuck with accident bills,” Hunter said.

The CFA highlighted the California Low-Cost Auto Insurance Program (CLCA) as a sound offering from the state. California legislators established CLCA in 1999 and, currently, the program’s highest average annual premium is $347 in Los Angeles. Enrollees who qualify for the program have to meet certain requirements that include caps on income and car value for participants.

Other similar low-cost options exist in Hawaii and New Jersey, the CFA has said in previous reports, but such programs are sometimes unknown to the consumers who need them most.

The programs in New Jersey and California, according to the CFA, have relatively low enrollment numbers compared to the rate of uninsured drivers in those states.

About Ben Zitney
Benjamin Zitney has been covering the auto insurance industry for the past 2.5 years. Before coming to Online Auto Insurance News, he produced an extensive company history of the 30-year-old California Joint Powers Insurance Authority and worked at the Cal State Long Beach Daily Forty-Niner as a reporter, copy editor and news editor.

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