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Poor pay more for auto insurance

By Jay MacDonald · Bankrate.com
Friday, February 3, 2012
Posted: 10 am ET

The poor pay more for auto insurance and that ain't fair. That's the executive summary of a new study by the Consumer Federation of America funded by the Ford Foundation that calls for an end to de facto price discrimination based on questionable rating factors.

CFA executive director Stephen Brobeck and director of insurance J. Robert Hunter unveiled their findings at a press teleconference on Monday. The study focused on the economic impact of auto insurance on low- and moderate-income consumers, defined as the roughly 40 percent of us with annual incomes below $40,000.

It wasn't exactly breaking news that many low-income drivers struggle to afford required car insurance these days; all states except New Hampshire mandate liability coverage and four-fifths require uninsured motorist coverage. What was shocking was how badly these drivers are being treated by the auto insurance companies.

"The cost of minimum liability coverage varies by state, but is affected by a number of factors that are beyond or nearly beyond the driver's control, including age, gender, residence, education and occupation," says Hunter. "Many low- and moderate-income drivers, because of largely uncontrollable factors, pay a high price for auto insurance, even if they have maintained a perfect driving record and drive relatively few miles."

To prove it, CFA did the following real-life math using a 30-year-old single male from St. Louis with a perfect driving record who commutes 20 miles per day:

If he was an executive in an exclusive suburb, his rate was $558.

If he only had a high school diploma, his rate went up $71.

If he had been unemployed for a period, his rate went up $84.

If he moved to a lower-income ZIP code, his rate went up $347.

If he paid on installments, his rate went up $60.

If he was uninsured for a period, his rate went up a whopping $638.

If he didn't have a car for a time, his rate went up $337.

"This drives what used to be a $558 rate to $2,095, an increase of $1,537," notes Hunter. "None of these factors are affiliated with risk, yet you can see that his rate went up almost four-fold just by changing a few of those factors. Insurers have never provided a thesis on many of these factors on why they measure risk. We think these factors are surrogates for income, which is forbidden to be used by all the states, and the use of these proxy factors should not be allowed in our estimation."

To make matters worse, in several states, including Arizona, Texas and Arkansas, some major insurers charged some drivers higher premiums for the state-mandated minimum coverage than for the higher limits that wealthier drivers might purchase.

"This is like charging more for a little box of cereal than a big box of cereal," says Hunter. "It appears that some insurers are discriminating against purchasers of the minimum coverage who are disproportionately lower-income car owners."

As for solutions, the CFA suggests several:

  • Lower minimum liability requirements.
  • Lower rates for required minimum liability coverage.
  • Consider establishing a low-income auto insurance program.
  • Add some risk factors, such as miles driven, that might lower the insurance rates of lower-income drivers.
  • Hold a National Association of Insurance Commissioners hearing to address auto insurers who charge more for minimum coverage than for standard policies.

"It is urgent that state insurance commissioners act to reduce disparate treatment and reduce disparate impact," says Brobeck.

What are your thoughts on the CFA findings?

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3 Comments
SD
February 03, 2012 at 3:45 pm

I have to disagree with the supposed unfairness of using these types of rating factors (disclosure, while I don't work on insurance, I do work in the credit industry, so I do have relevant experience in understanding risk factors and underwriting).

I can't necessarily justify all the factors mentioned, but I think there is just cause for many. For a moment, look at it from the insurance company's perspective. I (the company) have a client that lives in a lower-income part of town, and while he may be an executive or whatever, the fact is, living in a rougher part of town, or being unemployed and having less financial resources, will lead to a higher loss for me, the insurance company. Say his car gets broken into, or because he's in a low-income area, even if he has a clean driving record, someone else might try to intentionally cause an accident to try to substantiate an insurance claim; this may sound hokie, but it does happen, and more than people think. If he suffers a loss, since he has lower income, he is going to have to use his insurance to cover the costs of the loss, which is a loss to the insurance company. If there are now 20 people like him in the same neighborhood, that's 20 times the loss, so everybody in that neighborhood needs to pay enough to cover the expected losses for that neighborhood. Now, with the assertion that income is not supposed to be used in these considerations, I think that's where the company is put at a disadvantage. There ARE way more factors that go into insurance than just a person's driving record, and those factors need to be considered accordingly.