Consumer group: Non-driving factors unfairly drive up cost of auto insurance

Nick DiUlio

The Consumer Federation of America has some disheartening news for low- and moderate-income drivers. The nonprofit consumer advocacy group says some of the factors used to set rates for auto insurance are unfair and make coverage too costly.

In a national survey released Sept. 24, 2012, the consumer group found that the majority of consumers don’t think it’s fair for auto insurers to use rate-setting factors like education, credit score, occupation and lack of previous insurance.

In a separate study, the federation found that most major insurers use these types of non-driving factors when determining rates – a practice that the group says boosts premiums for low- and moderate-income drivers by more than 100 percent in some cases.

“Insurers are permitted to use factors such as education and occupation in setting prices even though these factors have nothing to do with driving and discriminate against lower-income drivers,” says Stephen Brobeck, executive director of the Consumer Federation of America.

Brobeck adds: “Premiums should largely reflect factors such as accidents, speeding tickets and miles driven, over which drivers have some control and which directly affect insurer costs.”

‘Clearly discriminatory’ data

To analyze the effects that various non-driving factors have on insurance premiums, the consumer group used the websites of the country’s five largest auto insurers — State Farm, Allstate, GEICO, Progressive and Farmers — to obtain a quote for minimum liability coverage for a 35-year-old woman in five cities (Baltimore, Miami, Louisville, Houston and Los Angeles).

The profile of the hypothetical female driver included her being a single, clerical worker who rents an apartment in a moderate-income ZIP code with an annual income of $30,000, a high school degree, good credit, and a 15-year driving record with no accidents or moving violations.

The consumer group used this profile to obtain quotes for the minimum amount of liability coverage required by each state (mandatory everywhere but New Hampshire). After obtaining a standard quote using these factors, researchers then altered each characteristic one at a time and compared the results.

For instance, the standard quote in Baltimore from Farmers resulted in an annual premium of $2,308. By changing only her marital status from single to married, the quote dropped to $2,002. By changing only her ZIP code to a higher-income location, her annual premium fell to $1,576. When all of these factors were changed at once, the result was an annual premium that came in 50 percent cheaper at $1,148.

Even when an at-fault accident was added to the hypothetical driver profile, premiums still remained “considerably lower” than those quoted for moderate-income clerical workers with clean driving records, the consumer group says.

“Essentially what this means is that if you are single, work a clerical job, rent instead of buy, don’t have a college degree and reside in a low- to moderate-income area, your insurance premiums will most likely double, and may even increase three or four times,” Brobeck says. “The use of these factors is clearly discriminatory, and a large majority think it’s unfair to use them when pricing insurance.”

‘Something is clearly wrong here’

To gather survey data, the consumer group hired market research company ORC International to ask 1,010 U.S. adults whether they think it’s fair for insurers to use 11 factors in pricing insurance.

Of those 11 factors, seven have nothing to do with someone’s driving record: age, gender, credit score, level of education, no previous insurance because the consumer did not own a car, occupation and ZIP code.

The four driving-related factors are traffic accidents caused, moving violations, number of years with a driver’s license and miles driven.

“Consumers strongly favor the use of factors related to driving, over which they have some control, in the pricing of auto insurance,” says Robert Hunter, director of insurance at the Consumer Federation of America. “And they reject factors unrelated to driving, over which they have little or no control.”

For example, 31 percent of the adults surveyed favor the use of level of education and 33 percent favor occupation in setting rates. On the other hand, 87 percent favor the use of traffic accidents caused and 85 percent favor moving violations.

“These factors may have some partial correlation in determining risk, but there’s nowhere near enough evidence to support their use so heavily,” Hunter says. “When your rate can be seven times higher just because you don’t have a college education, that’s absurd. Something is clearly wrong here.”

‘Credible predictors of risk’

Not everyone agrees with the Consumer Federation of America’s conclusions concerning fairness. For instance, R.J. Lehman, senior fellow and public affairs director at the R Street Institute think tank, says non-driving factors are statistically important in setting auto insurance rates.

“It should not be surprising to anyone that consumers dislike insurance rating and underwriting practices that run counter to their intuitive notions of justice and fairness. But insurance is built upon statistics, not intuitions,” Lehman says.

He adds: “Insurers are in the business of accepting and pooling risks, not in determining whether a particular applicant is a good person or even, necessarily, a good driver. What they want to know is how likely that person is to file claims. And data has shown quite conclusively that all of these disputed variables — gender, credit, education, persistency of coverage, occupation, ZIP code — are credible predictors of risk.”

Willem Rijksen is vice president of public affairs for the American Insurance Association, a trade group that represents car insurers. He says consumers should use this data to their advantage and shop around for the best auto insurance quotes.

“The use of these factors, such as credit-based insurance scoring, location of the vehicle, driver experience and traffic citations, helps insurers to more accurately price risk,” Rijksen says.

He adds: “Generally speaking, the more consumers know about these helpful tools, the more receptive they are to them given their broad overall benefit. As the study’s own data points out, auto insurance remains a very competitive market and consumers are well-advised to shop around to find the coverage that best meets their individual needs.”