Policyholders have pondered whether their auto insurance rates truly reflect their risk to their insurer, or whether they may be paying more because of other factors such as their income, their credit rating or their blind loyalty to their insurer.
Now, a two-year investigative study released today by Consumer Reports outright charges the auto insurance industry with unequal and unfair rate-setting that costs consumers more, based on factors that have nothing to do with the risk they pose to the insurance company.
Findings based on billions of rate quotes
In "The Truth About Car Insurance," Consumer Reports cast a broad net, analyzing more than 2 billion price quotes for 8 hypothetical single drivers of various ages from more than 700 insurance companies in every ZIP code in the country. While the investigators always included the largest auto insurer in each state -- typically Allstate, Geico, Progressive or State Farm -- they also analyzed such brands as Amica and USAA that rank high in customer satisfaction.
Here's what they found:
The cost of 'good' credit: The report found that consumers with merely "good" credit scores paid anywhere from $68 to $526 more for auto insurance than drivers with the best scores, depending on their state of residence. In New York, the average credit score ding was $255. In Florida, single drivers with a clean driving record and poor credit paid $1,552 more on average than drivers with excellent credit and a drunken driving conviction. You can check your credit score for free at myBankrate.
None of your business: Consumer Reports found that most insurers cherry-pick about 30 of the almost 130 elements in a credit report to set rates, but consider their process strictly classified. Should your FICO score fall short of excellent, guess what? The report alleges that insurers bump up the premium, even for customers who've never had an accident. Only California, Hawaii and Massachusetts (so far) prohibit the use of credit scores to set insurance rates.
Schooled on driver's training discounts: The study found that the oft-advertised deep discount for student-driver training "turned out to be little more than a mirage," with an average annual savings nationwide of $63. Notable exceptions included California (with an average savings of $334), Louisiana ($155) and Massachusetts ($386).
Anti-theft discount? Meh: The average discount nationwide for installing anti-theft equipment was a whopping $2, the report says.
Consumer Reports editor-in-chief Diane Salvatore didn't mince words about the importance of the findings.
Rate factors called not 'meaningful'
"Consumers have a right to expect that their car insurance premiums are based on meaningful behavior such as their driving record, and not on such factors as how they shop, pay their bills or how likely they are to tolerate that their rates have been hiked up," she says. "The insurance industry spends over $6 billion on advertising that only confuses the issue and makes light of the significant expense. We hope that our enterprising journalism will spur consumers to join forces with us and demand reforms and transparency in pricing."
Sick of it? Consumer Reports urges consumers to tweet their displeasure to the National Association of Insurance Commissioners, using the hashtag "#FixCarInsurance."
An explanation of how auto insurance rates are determined, posted Thursday on the website of the industry group the Insurance Information Institute, notes that for many insurers, "credit-based insurance scoring is one of the most important and statistically valid tools to predict the likelihood of a person filing a claim and the likely cost of that claim."
The Consumer Reports study is only the latest to call the industry's rate-setting into question. The Consumer Federation of America recently charged that women who are divorced or widowed are unfairly charged more for their auto insurance. In May, Bankrate found substantial differences in the auto rates of motorists living just blocks apart but in different ZIP codes.
Follow me on Twitter: @omnisaurus.
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Veteran contributing editor Jay MacDonald is co-author of "Future Millionaires' Guidebook."