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Ugly truth about auto insurance rates?

By Jay MacDonald · Bankrate.com
Thursday, July 30, 2015
Posted: 6 am ET

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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."

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11 Comments
George S
February 17, 2016 at 9:27 am

I recently was looking into purchasing car insurance, because my parents no longer want me on their plan. I was looking at A Abana Auto insurance and they have a post on their site about how to get lower rates. I thought it was a great read and majority of the information could be used with any insurance plan.

Vincent Distefano
August 21, 2015 at 1:17 pm

I am a policy holder for 61 years with the same company And i still get rate increase every 6 months with a clean driveing record What gives with these Ins. Co, they are only interested in how much it cost to fix an Auto. Its a shame the Insurance Commisser can do some thing to curtaile this increases every 6 months some one is fill there pockets is this AMERICA or what.

HOWARD FRITZ SR
August 04, 2015 at 9:49 pm

WE HAD AAA CAR INS SINCE 2008 GOT A NEW CAR 2011{LEASE}PAID
5/15 $107.65 6/15 $63.25 7/11 $85.80 THEN 8/5 THRU 6/6/12
PAID 57.20 7/5 $96/47 THEN 8/5 THRU 6/6/12 PAID $63.23
PRICES WERE ABOUT SAME TILL GOT A NEW {LEASE} 2015 WENT FROM A TOYOTA RAV4 TO A HONDA CEVIC INS WENT UP TO $1115.00 0R $110,00
A MOMTH GOT A FOUND A NET INS BEFORE PAYMERY DUE PAID NEW INS
first in time TO STOP OTHER AUTO PAY THEY TOOK IT OUT REFUNDED
ONLY PART SAID DIDNT GET ENOUGH NOTICE WONT SEND THE FULL $75.+
NEED INVESTATED THANK YOU HOWARD & EDNA & FRITZ P.S.IN ARE 80

Carole
July 31, 2015 at 7:51 am

When I questioned my insurance carrier why my rates went up, she said it was because I have a new vehicle. When I sold the new vehicle and bought a used vehicle, she said the rates went up because parts are harder to find for an older vehicle.

John Cherry
July 30, 2015 at 4:48 pm

It is my understanding that insurance companies do their best to break even on property insurance. They make their money on investments. If more people are driving and more people are having accidents, then more payouts are being made from the money pool. They have to replenish the money pool to a certain percent of the amount they are insuring. So if they insure, say.. $1000 worth of property, they may have to keep $500 in the pool to cover any claims. If the claims come in and they are $1500, then the pool of money has a deficit of $1000, so they raise the rates to over it. Pretty simple math. Don't file so many claims and your rates will fall, as a whole, not individually.

Marshall Rice
July 30, 2015 at 4:42 pm

The insurance companies pay out a lot more for injuries or deaths in car accidents than to replace the damaged cars. The rates are, or at least should be based on the risk of injuries, not the value of the car. Newer cars are often safer. My insurance rates actually dropped slightly the last time I traded for a 5 year newer truck.

Lynne
July 30, 2015 at 3:28 pm

Car insurance up $220.00 per year same cars same drivers no accidents or tickets????????

Alice
July 30, 2015 at 2:45 pm

To All Insurance Companies: Why do you all charge more every year for the same car owned that depreciates every year, perfect driving record,credit rating of over 825, and still I see higher rates year after year. Is it a revenue ticket or just higher salaries, bonuses ect....where's the control.

James Q. Burgess
July 30, 2015 at 2:22 pm

I'm 86, retired professional engineer, and my lifelong experience with auto experience suggests a cost/benefit ratio of between 2 and 4. Insurance is professional gambling with the odds disproportionate to the risk.

David Watkins
July 30, 2015 at 2:17 pm

Here's a good one -- as the value of my car goes down and the amount the insurance company is on the hook to pay off on the car should they total it the insurance goes up (every year) instead of going down based on a payoff. There's something really wrong with that. I understand there are other factors like liability ETC. But there should still be a depreciation of my rates based on the true replacement value of the car. The truth is just the opposite on houses they raise your rate based on the home becoming more valuable so in truth in this scenario they have their cake and eat it too!!