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Subscribe to RSSIf you believe the ads, good drivers get the best insurance rates. But a new study shows auto insurers frequently charge good drivers higher premiums than those who recently caused an accident. And it appears from this research that the safe drivers who pay more are often lower income.
How could this happen?
The Consumer Federation of America (CFA), which conducted the study, says this reflects a common practice in the insurance industry of using factors such as education and occupation to rate risk.
A CFA survey in 2012 found that two-thirds of American believed considering these factors, rather than driving history was unfair.
Stephen Brobeck, CFA’s executive director, calls this a “discriminatory practice” that raises the rates for low-and moderate-income drivers.
The industry rejects any notion that it discriminates in any way.
“The policies we offer are fair in every way,” said Michael Barry, vice president of media relations at the Insurance Information Institute.
How CFA surveyed the marketplace
The CFA priced policies for two hypothetical customers: a high school receptionist and an executive. Both women were 30-years old, had driven for 10 years, lived on the same street in the same middle-income ZIP code.
But there were important differences.
The receptionist is single and rents an apartment. She has never had an accident or moving violation, but she was without insurance coverage for 45 days.
The executive is a married homeowner with a master's degree. Her auto insurance has never lapsed. But, she had an at-fault accident with $800 of damage within the past three years.
CFA researchers visited the websites of the five largest U.S. auto insurers – State Farm, Allstate, GEICO, Farmers and Progressive – looking for the minimum liability coverage required by that state. This was done for both women in 12 cities.
The results: Two-thirds of the 60 quotes were lower for the executive (who had an accident) than for the receptionist (who had none), often by 25 percent or more.
The Insurance Information Institute questions whether the test was fair because the receptionist had a break in insurance coverage and that could be seen as a risk factor. The Consumer Federation of America says the receptionist didn’t have a car for 45 days and therefore didn’t need insurance. Does that make her a riskier drive, they ask?
Why is this happening?
Insurance companies consider a variety of factors to determine the risk you pose and the price they should charge when you apply for an auto policy. Everyone agrees your age, sex, type of vehicle and driving history can help predict the likelihood that you will have an accident.
But should insurance underwriters consider your education, occupation or in some cases, your credit score? What do these socio-economic factors have to do with your ability to be a safe driver?
“These factors have been found to be actuarially sound ways to assess risk,” said Michael Barry, vice president of media relations at the Insurance Information Institute. “And before they are ever used, these rating criteria are vetted by state insurance regulators who have allowed them.”
The CFA says it’s not fair for someone to get a better rate simply because they have more education and more income.
“Our concern is that these factors are not proven; there is no logical reason to explain why they should work,” said Robert Hunter, CFA’s director of insurance and former Texas Insurance Commissioner. “The insurance companies say there’s a correlation and that’s all they need.”
Some insurance companies now consider your credit scores when setting your premiums. That doesn’t sit too well with Washington State Insurance Commissioner Mike Kreidler, who calls the practice a “blatantly unfair” way to assess risk.
“I think it’s terrible,” Kreidler told me. “Using a credit score in this economy? You have people who through no fault of their own have wound up with less quality credit and yet are still responsible drivers. They shouldn’t pay more for auto insurance because of that.”
Not in sunshine state
The California Insurance Department decides what ratings factors can be used by auto insurers to calculate auto premiums. Education, occupation and credit scores cannot be considered.
“We want rating factors that have a relationship to the risk of loss,” said Joel Laucher, California’s deputy insurance commissioner for rate regulation.
“You want something that’s fair and fairly intuitive so people understand why there would be a price difference. It should be something the driver can control and realize how they can amend their behavior to improve their rate.”
Massachusetts also restricts the use of socio-economic factors for private auto insurance.
“There was a determination made that auto insurance should more tightly track an individual’s driving,” said Massachusetts Insurance Commissioner Joe Murphy.
The bottom line
There are a lot of insurance companies competing for your business. Rates vary greatly.
A good place to start is your state insurance department’s website. Look for a comparison chart that lists the rates in your area for various hypothetical customers. It’s a simple way to see how various insurance companies compare and where you might want to go to get a quote.
(Find a link to your state’s insurance department at: National Association of Insurance Commissioners.)
You can get quotes from an independent agent who represents various companies or go online and do it yourself at sites such as InsuranceQuotes, InsWeb, NetQuote, InsuranceHotline or Answer Financial. Don’t expect an instant quote from these sites. In most cases, you’ll be contacted by agents looking for your business.
More information:
- ConsumerMan: Want to Cut Your Car Insurance Bill? Shop Around
- Consumer Reports: Car Insurance Buying Guide
- Insurance Information Institute: What Determines the Price of My Auto Insurance Policy?
Herb Weisbaum is The ConsumerMan. Follow him on Facebook and Twitter or visit The ConsumerMan website.
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I have many friends who lost their jobs since 2008 and fell behind on their bills. Next thing they know car and home insurance rates went up when they were already struggling!
American businesses love to talk BULL@!$%#!!!
Who do you think is paying for all of the people who don't have insurance? They say one of out 6 drivers is not insured. If you live in a state that gives drivers licenses out to illegal immigrants, that total is much higher. The percentage of hit and run accidents goes up, and still, they don't do anything if the driver is involved in an accident and is found to not have insurance, they walk free. What good is a law that you must have insurance if they give licenses to people who don't get it? Then they have accidents and drive away. Only if they catch the person do they do time, and if they are let out on bond, they slip back to Mexico before the case comes to trial. The people paying for this are the poor people with good driving records.
Crooks will figure out a way to cheat people in all sorts of businesses. These study results do not surprise me. The "no insurance" excuse is just a way to jack the customer around, no consideration to her not having a vehicle apparently. let the buyer beware has been right on target for thousands of years, some things never change.
Couple of items here: First, if you're paying for something, obviously you're paying more than someone not paying at all, or paying less. Folks with more income will pay for more options, as well as pay more to cover the company's loss when a claim occurs because the other driver had no insurance.
Second, using proxies such as credit scores, income, or education probably are pretty valid for assessing risk of that *group*. All the commenters are correct in thinking that those proxies say nothing about an individual. However, the insurance company really is in the business of covering groups, and try to assess which group an individual is in based upon those proxies they can find that reliably assess which group a member should belong. As a whole, the evidence shows that groups with different educations drive different--so it is valid to rate them accordingly. Your mileage may vary
Actually, many years ago a study found that drivers who had declared bankruptcy during the preceding year were much more likely to get into a car accident.
Bullsh!t...just another example of unregulated Capitalism's rigged system in favor of the rich and another form of discrimination.
Wow. LOTS of flap about a completely contrived "study"!
No. I'm in no way either a fan or or apologist for insurance companies. No. They are in no way "honest" or interested in charging what is "right" or fair. And, YES, one really does need to think very very carefully on why insurance has become some sort of mandated thing in your society - why indeed that there is such a large insurance LOBBY and why indeed there are so many politicians involved in listening to and supporting insurance comapnies over the wishes - even the queries and expression of curiosity - by their constituents. IF it were a GOOD thing, one might expect that NO LOBBY would be needed to get it into your laws.
Hey. I live down on the Gulf Coast, land of hurricanes. After Katrina (2005), LA and all other Gulf Coast state Insurance Boards and Commissioners and your/our politicians - allowed insurance companies to vastly increase their rates, and to suddenly - after what, only many decades of writing home-owner's insurance policies down here - decide to create a 5% "named-storm insurance deductible". Right. raise rates, and create a case where they will automatically step out of paying. What's fair, honest, or right about that? So perish the thought that the insurance business is acting in anyone's favor but their own. Same for driver's insurance as for home-owner's insurance. "Lots of factors" used to "fairly" determine your premium? No. Not at all. Just figuring out how best to make a PROFIT and from whom.
As to the reported STUDY: It's BS. IF you or anyone else wants to figure out what "factors" affect your insurance premiums - try doing a real STUDY designed to actually test your question. Folks - even the insurance companies - do this all the time. Speaking as a professional STATISTICIAN (I know, one of the scum of the mathematical universe and able to lie as desired with numbers); The one reported is nonsense. It's a cross-factorial design which "tries" to include age, income, driving record, etc. etc. and sort out the relative effects of these potentially contributing factors ("things which may affect your rates regardless of other things") using a sample size of 2! And then they "publish" this BS here to tease you!
IF I were going to assail these questions - such as "does age affect your rates"? Does Income? Driving record? "Lapses" in insurance? Education? Credit rating?, I would DESIGN a test using with POOLs of folks. I would have multiple "young, single, female receptionists" which could be compared to "older single female receptionists" where both age-groups shared a common set of income-range, credit history, accident record, etc. Redo the test for each other factor you want to explore.
Any experimental-design does some version of this to assail the desired question. It's easy to do actually - the "authors" could easily have created numerous "receptionists" with different histories, etc., and "pitted" the groups against each other with insurance companies to explore rate impact by driver history or whatever. The insurance companies do this by simply analyzing the data collected on millions of policy-holders. Why this "study" doesn't follow these established routes and practices is because the "authors" merely wanted to stir you around!
Go to a magic show. This is why the old magician has the pretty girl all decked in sequins - most watch her and few the hands of the magician as he works his trick. Distraction value is a GOOD thing when you want folks to look elsewhere!
Of course the article make a good point-shop your insurance frequently!!! Get an "A" Rated Best Company-the definition of coverages like BI-PD,Comprehensive and Collision are all the same with whoever you have your policy. Base your coverages/deductibles on how much you can afford to lose and the amount of discount/premiums saved that having a higher collision and comprehensive deductible will bring. "Never risk a lot to save a little." Don't scrimp on liability and property damage to others. And............. Forget the insurance company that thinks it's a university-they'll never make the dean's list for accreditation.
No different than charging young males more. My record is MY record. It doesn't matter a damn what any other male driver has ever done.
Judge me for being me, not because of something that had nothing to do with me.
I agree, but insurance is based on statistics...and statistics say that young males tend to have more accidents. Not all but in cases of course.
"“The policies we offer are fair in every way,”"
LMAO! Stop it dude, you're killing me!!!!!
As an ex agent in Austin, last time I checked, California was the only state that doesn't use your credit score as a partial rating basis. (This MIGHT have changed in the last year) I had thought that was pretty lame when I started out in insurance until I was told that it boils down to statistics....people with better credit file fewer claims and also pay make their payments on time. And you know what? It's true. For the 8 years I did that kind of work, the people who had the worst scores either paid late, lapsed or had claims. I don't like it, because like myself, I have a clean record, but lousy credit. Our wonderful legislators voted that in a long time ago. I hate it. It's not fair to everyone, but it is true.
Also, if you can prove you have carried liability insurance for the last two years, without any lapses' longer than 30 days, you get better rates. That way, people can't pay for a month of coverage and then have proof of coverage showing 6 months. In TX they can pull up your VIN# and see if it's active now. This is supposed to help the rates go down. Especially the Uninsured/Underinsured coverage. There are way too many people here driving around without coverage hitting people like us who actually pay for insurance.
The company I worked for gave you a discount for certain careers...policemen, firemen, teachers, etc. Usually 5% to 10% or so. That is really more for retention than anything else. We would ask that when they wanted to go somewhere else.
The reason that less educated people or people with lower incomes tend to pay more for insurance probably has to do with 2 things 1) credit scores and 2) the fact that a poor person is probably less likely to shop around. The credit score does not seem relevent to your risk of being involved in a collision, but the numbers show otherwise. I
Hmmmm... No one on here has included the cost of parts and labor, total loss or theft. That is also part of your premiums. Did you know?
Yet another article written by someone that doesn't understand statistics. Love it.
Incorrect. They need a lot more than correlation. If a correlation is found additional statistical tests (regression) must be run in order to confirm that a factor can be used to reasonably predict an outcome. In my early stats class I found strong positive correlation between deaths and education. So we should then speed up people dying so that our education goes up faster, right Mr. CFA director? Correlation is not a prove all statistic... sorry. Maybe his education should have been considered for this position.
Really? So your credit score doesn't reflect responsibility? Sure it does. High credit scores means you can manage your credit and understand the costs so that you can maintain a high score. Low score is the opposite. Driving a car takes responsibility doesn't it?
No fault of their own huh? So banks forcefully made individuals take on more credit than they could afford? And those individuals had no option to decline the credit line because they knew they couldn't afford it? Again... stupid argument. People have a low credit score most likely due to poor decisions; not always but statistically speaking low scores are due to mismanagement of finances much more than not having a credit line established.
Well... this wasn't always the case. In fact, insurance companies were taken to court when they first created these predictors to apply to their actuary tables for discriminatory practices. Through statistics they could show these factors could be used to reasonably predict risk. Only then did the courts agree and allow insurance companies to discriminate based on those factors. It then become "everyone agrees" in a sense.
So yes. I bet, if taken to court, the insurance companies can and will prove that some if not all of those factors can be used to predict risk.
It would make sense if "bad" drivers got better rates because they tended to shop around more as a result of the effect of their bad driving on their insurance bills. I know that people who have access to more than one cable tv provider can get a better deal by threatening to leave one provider to go to the other. The same is sometimes true for cell phone service.
As for using metrics like education to set rates, the only valid question is whether there is evidence that the factors being applied are actually good predictors of how likely a person is to have an accident. It's tempting to say that the insurance companies are in a competitive environment and wouldn't set rates based on invalid assumptions, but stranger things have happened.
As for not using a history of "good" driving, it's hard to believe that insurance companies that are competing with other insurance companies could avoid doing that, because they would be losing business as a result of high prices.
Maybe the problem is that people who are "good" drivers tend to be risk-averse people, which means that they tend to be the kind of people who place a high value on things like insurance. At the same time, risk-averse people may not like changing insurers frequently, because it feels less stable. Thus, it may be that the "good" drivers are paying more because they tend to have personalities that value insurance more and do not like to make a lot of changes in things like insurance.
The other explanation is that insurers are coordinating with each other so that they can charge each individual customer the highest price that individual is willing to pay. Because competition makes it difficult to do that, such coordination is likely to be unlawful.
You have a perfect driving record. You have a bad credit report. You have never had an accident or ticket..........Hmmmmmmmmmm bad credit report, financial collapse 2009 and many unemployed Hmmmmmmmmmmmmm Higher premiums.....Brilliant! Credit bureau's figured that out many years ago. 700 fica score used to be A credit. The scale was moved to 800 and now it will approach 900. Brilliant! And we just keep taken it like a champ! Brilliant! Unfortunately we have no lobbyists for us.....Brilliant X 2 !
They have got to ban using credit scores for things other than getting credit cards or loans. Unless your job is to manage money, there is no reason to use credit scores for anything else because it's an assumption that is not valid of everyone.
Simple rule of capitalism allow company to make certain rules equals someone or many cheated, somewhere theirs a politician who aided in these rules, regulations and laws. this will never happen but large corporations must be policed just like you and I.
We want rating factors that have a relationship to the risk of loss. You want something that’s fair and fairly intuitive so people understand why there would be a price difference. It should be something the driver can control and realize how they can amend their behavior to improve their rate.
Sounds like regulation is a good thing.
Insurance companies are some of the biggest thieves out there.
Would those be the same state insurance regulators who Michael and his ilk ply with millions of dollars worth of lobbying activity, or the state insurance regulators on some other planet in a galaxy far, far away who represent the interests of the people they are supposed to represent?
Get real! These P.R. spokespeople of the insurance companies have no credibility whatsoever.
Insurance is the biggest legalized scam going.
With no other product are you forced to buy it, pay for it based on a fuzzy, unproven evaluation... then when you need it, they refuse to pay or low-ball the service/payment.
In any other business what insurance companies do would be illegal.
When insurance is required by law the companies selling it should be non-profit....
Insurance is a racket and a rip off and since it's required by law in many states. There is not a thing the consumer can do about it, the insurance companies know this and they LOVE it...
Insurance is another great example of modern America.. Do things right and you still get screwed.. Drive safe, 0 accidents, 0 tickets, 0 claims and your rates will still increase.. Someone has to pay for all the other people that screwed up and it will always be the person that does the right things...
This is a good posting; I was wondering if I could use this write-up on my website, I will link it back to your website though. If this is a problem please let me know and I will take it down right away.
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