According to a case study conducted by the Consumer Federation of America (CFA), some of the largest automotive insurers charge some safe drivers more per month for car insurance than those with poor driving records.
NerdWallet investigated these findings by speaking with the author of the testimony featuring the CFA data, Robert Hunter, Director of Insurance at the Consumer Federation of America. We also spoke with Douglas Heller, Executive Director of Consumer Watchdog, a non-profit consumer advocacy organization, to discuss insurance companies’ pricing techniques.
Findings in the CFA Report
CFA found that these major insurers—Geico, Progressive, State Farm, AllState, and Farmers—placed more emphasis on their customers’ income and income-related factors than their driving record. In other words, a driver’s education and occupation held more weight with the companies in determining how much they paid for auto insurance.
The case study took place in 12 American cities and analyzed five major auto insurance companies, finding that:
“Major insurers charged a safer driver with less education and a lower-paying job higher premiums two-thirds of the time.”
It also found:
“In a majority of those cases, the premiums were at least 25% higher [and in some cases] the rates were more than double what was quoted for a driver who had recently had an accident but had a higher-paying job.”
What does this mean to safe drivers looking for affordable insurance across the country?
How Two Hypothetical Drivers Got Priced
The CFA created two fake Internet users—or hypothetical customers—to go online and search for rates on the websites of the five auto insurance companies. The fake users were two women, age 30, who drove the same make and model car, had the same mileage, and who were both seeking minimum liability insurance. The women would live on the same street in the same middle-income zip code.
One woman was a single receptionist with a high school education who rented her home compared to the other customer who was married to an executive who owned her home. The former customer had been without insurance for over a month after a perfect, 10-year driving record, while the latter had no lapse in coverage but recently was at fault in a car accident.
The results of the CFA study found startling differences between what the two women would pay for auto insurance from the top five insurers in their location.
The most extreme difference, for example, was:
“Allstate in Baltimore quoted the receptionist an annual premium of $3,292, compared to $1,248 for the executive — a difference of 164%. Of the five companies surveyed, only State Farm consistently quoted lower rates for the receptionist — the safer driver.”
Although insurance companies are not allowed to base these rates on personal or household income, the CFA found that “rate-setting practices tend to result in higher rates for low and moderate-income drivers.” The CFA also noted that these unequal and high rates for low-income customers are part of the reason why one-third of low-income drivers in the United States are uninsured, despite being required by law.
Insurance companies often use credit scores to calculate insurance prices. Is that the norm, and is it justified?
Douglas Heller, Executive Director of Consumer Watchdog, notes that the credit reports are used as a surrogate for income and are a technique used by insurance companies to raise prices on low-income drivers:
“It’s counterintuitive that these insurance companies would charge someone with a poor driving record but high income a lower premium than someone with lower income but a better driving record.
The practice the CFA uncovered in their report is one that’s long standing. The industry uses factors having nothing to do with a person’s ability to drive safely, in order to discriminate and meet marketing goals. The credit reports are used as what we call a surrogate.
Insurance companies say that they do not base their rates on consumer’s income. However, they use credit scoring as a surrogate for income – the two share a correlation and it’s been a way for these insurance companies to slice and dice society to their liking and they use these techniques to cover up their discriminatory practices. They are setting prices by marketing goals rather than being an honest business that is trying to provide coverage to drivers. They use these pricing schemes to draw in customers they like and keep away those they don’t.”
Are the findings by the CFA just an issue for low-income drivers, or is this discrimination a concern that everyone should take seriously?
“The industry as it stands in most states is not fair and it doesn’t work for millions of drivers. This is a problem because it results in too many people driving around uninsured, which is not just a problem for the driver, but also for everyone else out there on the road as well. It needs to become a public policy goal to make insurance more affordable and available to all drivers, especially good drivers. Consumers, insurance regulators and law-makers have to confront the inherent injustice of these insurance practices and stand up to insurance lobbyists.”
We then turned to Robert Hunter, Director of Insurance at the Consumer Federation of America, to ask what reasoning insurance companies use to justify looking at credit reports:
“The closest to an argument they have is that people that allow their credit score to go bad, are careless. However, some people just lost their job during the recession, what does that have to do with carelessness? It’s just a tactic to raise rates on poor people and attract the type of customers they like to which they can also sell other products like home or life insurance.”
Finally, why is it so difficult to pass laws preventing the insurance companies from these practices?
“A certain percentage of regulators, last time it was between 16-18%, actually work in the industry. So, there is a very strong conflict of interest between state regulators and the insurance industry.”
Car crash image courtesy of Shutterstock.