Auto insurance premiums often rise for good drivers as a result of insurance companies' consideration of personal characteristics related to customers' economic status, according to a new report by the Consumer Federation of America (“CFA”).
The CFA said that it analyzed minimum limits liability premiums quoted to men and women in 15 cities by five of the nation's largest auto insurers and found that premiums jumped by an average of 59 percent, or $681 annually, when characteristics of the drivers were changed to reflect a “lower economic status.”
“Insurance companies should judge you on how you drive, not who you are,” said J. Robert Hunter, the CFA's director of insurance and a former insurance commissioner of Texas. “Insurance companies are penalizing good drivers by hundreds and sometimes thousands of dollars each year based on economic and social status, and the end result is that the poor pay more, much more.”
The CFA said that it tested the impact of the following five factors used by insurers to price auto insurance:
- Level of education
- Occupation
- Homeownership status
- Ownership of a car during prior six months
- Marital status
Despite having the exact same driving record and living at the same address, drivers pay higher premiums 92 percent of the time if they have a high school degree and a blue collar or hourly job, rent their home, have not owned a car (and had no auto insurance) for the past six months, and are unmarried, according to the CFA. Each of these factors is associated with lower economic status, the CFA said. The CFA also said:
- The average premium for all drivers with higher economic status indicators is $1,144, while the lower economic status driver is charged $1,825, a $681 (59 percent) increase.
- GEICO and Progressive charge the largest average percentage increases (92 percent and 80 percent, respectively) to lower economic status drivers.
- Allstate and Farmers charge the largest average annual dollar increases ($915 and $900, respectively) to lower economic status drivers.
- State Farm charges smaller increases to lower economic status drivers (13 percent, or $217 annually).
- Drivers in Queens, New York; Jersey City; Boston; Atlanta; Minneapolis; Houston; and Jacksonville face some of the steepest increases.
The use of economic factors varied by company and from city to city, but drivers in all cities but Los Angeles saw rates rise by at least 33 percent on average after accounting for the cumulative impact of the five factors, according to the CFA.
Los Angeles was the only city tested in which there was consistently little difference between the lower economic status driver and the upper economic status driver. The CFA said that this is because, under California's consumer protection laws, all of the non-driving factors it tested are prohibited from use in auto insurance pricing in California with the exception of marital status, which accounts for the nine percent, or $80 per year, average premium difference seen in Los Angeles.
The only instances where premiums came down for lower-income drivers were from Allstate, which lowered rates by 19 percent for the lower economic status female driver in Chicago and by four percent for both male and female drivers in Oklahoma City, the CFA said.
The CFA added that, in 21 instances, State Farm, Farmers, or Allstate would offer a quote for coverage to a “high status” driver but did not supply a quote to his or her lower economic status counterpart at the same address. The inability to get an online quote for coverage creates another barrier to obtaining coverage for lower- and moderate-income drivers, according to the CFA.
In response to the CFA study. David Snyder, the vice president of policy development and research at the Property Casualty Insurers Association of America (“PCI”), said in a statement:
The central flaw in the Consumer Federation of America's report is that all factors, including the ones they focus on, are used because they are proven to increase the accuracy of predicting risk of loss. It is important for consumers to understand that insurance pricing must be based on actuarial science and is subject to ongoing and rigorous regulation which ensure that all rating factors comply with the law.
Consumers want insurance to be based on the likelihood of someone having an accident or filing a claim. Rather than just relying on state motor vehicle records which are plagued by many omissions and unreported events insurers use a wide variety of factors that have proven to be associated with risk of loss in order to draw the most accurate picture of each driver.
Another flaw in the CFA's report is that their premium calculations do not include many variables that can bring down rates such as miles driven and usage based insurance.
Rather than rehashing the same old critiques regarding the lawful practice of risk based pricing, we urge the CFA to join with insurers and work with us to reduce accidents, and cost factors that drive auto insurance costs for all consumers such as distracted walking and driving and drugged driving. Consumers benefit from risk classification factors that distinguish lower-risk policyholders from higher-risk policyholders. The more risk assessment tools available to insurers, the more accurately risks can be priced. In this way, premiums paid by insured drivers are more equitable. However, we do agree with the authors who stated that insurers do not use income in pricing nor would regulators permit that.
Victoria Spears
Victoria Prussen Spears is senior vice president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. A graduate of Sarah Lawrence College and Brooklyn Law School, Ms. Spears was an attorney at a leading New York City law firm before joining Meyerowitz Communications. She may be contacted at [email protected].