Uneven insurance pricing targeted
Be a safe driver. Don’t buy a flashy sports car. Pay the insurance premium on time.
These are maxims many drivers follow to keep their auto insurance costs in check. But they may not be enough for many low-income drivers, who consumer advocates say are routinely priced out of insurance coverage because they are judged not just by their driving records, but by their credit scores, occupation, education level or other factors.
It’s a discriminatory practice by insurance companies that disproportionately increases premium payments for low-income drivers, said J. Robert Hunter, a former Texas insurance commissioner and director of insurance for the Consumer Federation of America. And some states are trying to stop it.
There are three states — California, Hawaii and Massachusetts — that prohibit insurers from using credit scores to determine how much drivers should pay. And legislation was introduced this year in almost a dozen others to prevent insurance companies from using credit scores, occupation, education level or other standards in factoring how much they should charge for car insurance, according to the National Conference of State Legislatures.
In addition, California, Florida, Indiana, Maryland, Ohio and, most recently, Pennsylvania, have ruled that insurance companies cannot use “price optimization” — evaluating consumer data or rivals’ prices to determine whether a customer is likely to shop around — to set prices for policies.
Doug Heller, a California-based consultant to the CFA, said low-income drivers may be less likely to shop around for rates partly because of lower financial literacy. Insurance companies spot that, he said, and will raise premiums on those drivers because they think they’ll stick with them rather than go to a competitor.
“The insurance companies charge the most to the people who can afford it the least. That’s because auto insurance companies place such a large emphasis on their customers’ occupation, level of education, credit history and other factors related to wealth, rather than driving safety,” Heller said.
But advocates for insurers say they use legitimate tools to set prices based on their financial risk. Price optimization has actually lowered insurance rates and is likely to create long-term price stabilization, said Robert Hartwig, president and economist at the Insurance Information Institute, a nonprofit communications group supported by the insurance industry. And, he said, auto insurance rates are declining for all drivers, including moderate- and low-income motorists.
By studying market factors, including competitor prices, rate-setting judgments become less subjective, Hartwig said, which could ultimately lead insurance companies to offer more discounts for longevity with a company.
His organization also opposes attempts by states to eliminate credit scores and other factors from rate setting, saying those evaluation techniques have proven to be legitimate measures of the financial risks associated with a driver.
All states, except New Hampshire, require drivers to buy at least a minimum amount of auto insurance in the event they cause property damage or injuries. For some low-income drivers facing high insurance rates, that presents a choice between driving illegally or not driving at all.
Insurance companies say they use a multitude of factors to determine how much each customer should pay.
The factors can range from driving record and type of car to marital status, credit score, occupation, education and where the driver lives.
Consumer advocates say these rating tools hurt low-income drivers because they are more likely to receive negative marks for being single, having poor credit, having limited education, or living in a neighborhood where there is significant risk of vehicle vandalism or theft.
“It’s like a utility in that everybody needs it,” Heller said. “But it’s not like a utility in that pricing is wildly different from one consumer to the next.”
But Hartwig said the factors insurers use to set prices can be mathematically correlated to the risks associated with insuring a driver.
“Some insurers use education, not all.” Hartwig said. “They do that because they have found that the level of education is associated with losses. There’s no factor that any insurer uses that doesn’t have to do with loss.”