A Consumer Federation of America report released Monday accuses auto insurance companies of unfairly penalizing low-income drivers.
By law, insurers aren’t allowed to ask about income. The CFA report says insurers are using a number of other factors -- such as ZIP code and education -- as proxies for income, and charging poor drivers much more as a result.
The report drew a sharp response from the auto insurance industry.
“As anyone who watches television commercials knows, auto insurance coverage is widely available in every U.S. state,” says Robert Hartwig, Insurance Information Institute president. “Drivers should shop around if they feel as though their current auto insurer is not meeting their needs, or charging too high a price.”
In fact, the CFA analysis comes right on the heels of a report from the National Association of Insurance Commissioners trumpeting another year of decline in overall auto insurance expenditures. (See “The cheapest states for car insurance rates.”)
So is insurance getting cheaper, or more expensive?
The company you keep
Our gilded age of computing offers companies the ability to slice and dice data to predict behaviors.
Amazon.com uses it to show you music you might like, and car insurers use it to set your rates. If drivers like you -- sharing your occupation, ZIP code, credit history or dozens of other rating factors -- file more claims, you will pay more for car insurance.
So, assuming you live in the right ZIP code and fall into the right buckets, you’re probably paying less than someone who doesn’t. (We strongly suggest everyone shop around, of course.)
The wide-ranging CFA report cites as an example a single man with a spotless record, age 30, driving a Ford Taurus 20 miles each way to work. With an MBA degree and an address in an affluent St. Louis suburb, his rate was $558 a year. The CFA then changed his rating profile to find the effect of:
- Less education, a $71 increase
- Unemployment, an $84 increase
- Moving to an urban ZIP code, a $347 increase (See “How your ZIP code drives up your car insurance.”)
- A gap in coverage, a $638 increase
- Installment payments, $60 (See “Payment plans can increase the cost of your insurance.”)
None of those factors means the Taurus owner is a worse driver.
Where the money is
Every insurance company sets its own rates, deciding how much each factor raises the risk of a claim being filed. But by law, each insurer must apply that rating formula to every driver equally within that state. For example, insurers can’t levy a surcharge for speeding tickets on drivers in some ZIP codes but not in others.
The nonprofit CFA says insurance companies get around the rules by charging more for rating factors and coverages likely to be shared by low-income drivers. Their analysis found some insurers charged more for bare-minimum policies than for those with more coverage. In some cases, insurers grossly overpriced coverage for drivers carrying minimum levels of coverage by many thousands of dollars, CFA says. In states where credit is a legally allowed rating factor, drivers with poor credit histories pay as much as 25 percent more, the CFA says.
Insurers argue that factors such as occupation and credit clearly are correlated to the risk of a claim. The CFA says that kind of thinking leaves good drivers unfairly paying rates they don’t deserve and can’t afford.
“It is difficult to avoid the conclusion,” the CFA report says, “that major insurers are far more interested in selling auto insurance to higher-income families.”
Is pay-per-mile the answer?
The CFA suggests several possible remedies:
- Lowered mandatory liability limits in some states
- More state-run insurance programs for drivers below an income threshold
- More aggressive examination of rating factors by state regulators, who must approve each company’s formula for calculating rates
- Development of pay-per-mile programs
Every state except New Hampshire requires some minimum level of liability coverage, but those levels change from state to state. Even that limited coverage can be very expensive. Our own CarInsurance.com survey of bare-minimum rates found annual premiums ranging from $342 in Wisconsin to $1,422 in Washington, D.C. (See “The cheapest insurance possible.”) About 14 percent of drivers go without any coverage at all, according to the Insurance Research Council.
The CFA points out that technology developed to provide usage-based insurance -- that is, insurance rates based on the driver’s recorded mileage and driving habits, pioneered by companies such as Progressive and State Farm -- could serve equally well in implementing pay-per-mile systems. Low-income families drive only about half as many miles as those in the highest brackets, the CFA notes.