Car Insurance Rates

Much has been written in recent years about the decline of the middle class in America. Another chapter was added today as the Consumer Federation of America (CFA) documented the unfair and discriminatory treatment working families receive at the hands of some major insurance companies.

The non-profit consumer organization released an analysis showing that many major auto insurers -- including GEICO, Progressive, Liberty Mutual, Farmers and American Family -- charge much higher rates to drivers with less education and lower-status jobs, even those with perfect driving records. 

 “In effect, auto insurers are discriminating on the basis of income and race.  States should prohibit the use of these demographic factors that bear no logical relation to insurer risk,” said J. Robert Hunter, CFA’s Director of Insurance, a former Texas Insurance Commissioner, and a former Federal Insurance Administrator.

Findings released

Among the findings released today by CFA:

• GEICO often charges a factory worker with a high school degree far higher annual premiums than a plant supervisor with a college degree – 45% more in Seattle ($870 vs. $599), 40% more in Hartford ($1299 vs. $926), 33% more in Oakland ($922 vs. $693), 23% more in Louisville ($2200 vs. $1791), 21% more in Chicago ($1013 vs. $840), and 20% more in Baltimore ($1971 vs. $1647).
• At GEICO, these differences would be even greater if, for education, the comparisons also included no high school degree and a graduate degree.  For example, the Baltimore factory worker would pay an annual premium of $2061 with no high school degree, an annual premium of $1971 with a high school degree, an annual premium of $1801 with a college degree, and an annual premium of $1722 with a graduate degree.
• Progressive also often charges a factory worker with a high school degree higher annual premiums than a plant supervisor with a college degree – 33% more in Baltimore ($1818 vs. $1362), 14% more in Houston ($1406 vs. $1236), 9% more in Louisville ($2390 vs. $2185), 9% more in Denver ($995 vs. $911), and 8% more in Oakland ($736 vs. $684).
• Liberty Mutual charges a high school graduate higher annual premiums than a college graduate – 13% more in Baltimore ($2116 vs. $1877), 13% more in Houston ($1373 vs. $1216), 12% more in Phoenix ($1592 vs. $1418), and 10% more in Hartford ($1913 vs. $1735).  In five other cities studied – Atlanta, Louisville, Chicago, Denver, and Seattle – Liberty’s website quoted rates for a college graduate but not for a high school graduate.
• In many cities, Farmers charges those who are neither professionals nor certain government workers five percent higher premiums.

In all of the cases cited, all factors except education and income were constant. 

“Auto insurers charge high premiums for minimal coverage to most working people, even those with perfect driving records, who live in urban areas,” said Stephen Brobeck, CFA’s Executive Director.  “Since most Americans need a car and almost all states require the purchase of auto insurance, many lower-income workers are faced with the choice of paying these high, and often unaffordable prices, or breaking the law by driving without insurance,” he added. 

CFA estimates that one-quarter to one-third of drivers with household incomes under $36,000 – 40 percent of all households – are uninsured.

There are exceptions

State Farm, Allstate, USAA, Nationwide, and Travelers apparently do not use education or occupation in their rate-making, at least in the ten states studied, CFA said.

“We commend auto insurers who are not using education and occupation in their rate-making,” said Brobeck.  “One reason insurance commissioners should address this issue is because these insurers may well feel pressured to adopt the discriminatory practices of GEICO and Progressive,” he added.

Allstate’s website did not ask for specific information about occupation but did require one to indicate whether one was employed or unemployed in many states, and in some states, to identify certain occupations such as firefighter or policeman, though it is not clear how Allstate used any of this information in rate-making.

Only in California did Travelers’ website ask for specific information about occupation, though it is not clear how the insurer uses this information in rate-making in that state.

You've surely heard various pro-individuality proverbs like “Be yourself” or “To thine own self be true,” but if you're trying to get the best rate for your auto or homeowner's insurance policy, maybe it's a better idea to “Be somebody completely different or at least act like it, so insurance companies won't use 'price optimization' against you.”

That's the one-sentence summary of this considerably more detailed report/editorial which the Consumer Federation of America (in conjunction with the Center for Economic Justice) released last week, saying “Insurance commissioners should bar industry practice of raising rates on customers based on shopping habits,” and calling upon insurance regulators to “stop insurance companies from using so-called 'price optimization' techniques when setting rates and premiums.”

Dynamic pricing

“Price optimization” is similar to “dynamic pricing” -- basically, charging different people different prices for the same item or service, for no other reason than “They'll pay more because they don't know they can get it for less.”

For example: in 2012, the Wall Street Journal discovered that people who visited the Orbitz website on a Macintosh were shown more expensive offerings than PC users, on the theory “Macs cost more than PCs, so Mac users must be richer.”

As early as 2000, Amazon shoppers discovered that new customers were often charged lower prices than repeat shoppers -- a disparity that disappeared when return customers cleared out their computer “cookies” letting Amazon identify them as repeat business.

According to the CFA, car and home insurance companies engage in price optimization by “charg[ing] higher premiums to those consumers least likely to shop for a new policy in the face of a rate increase.”

Driving record

Bear in mind that, where insurance companies are concerned, there are many legitimate (read: not “price optimization”) reasons for insurance companies to charge different premiums, to reflect varying levels of coverage or risk — all else being equal, a person with a flawless driving record will pay much lower car insurance premiums than someone who's racked up a few accidents and speeding tickets in the last couple of years, for example.

Insurance companies are legally obligated to charge varying premiums based on variable risks like that. However, the CFA and CEJ say that price optimization charges certain people higher premiums not because they're higher risks, but simply because they're less likely to shop around and look for a better price:

The products use “price elasticity of demand” research – which incorporates sophisticated market analyses to determine which customers would be likely to accept price increases and which customers, in the face of an increase, would shop around.  This enables companies to predict whether or not they could get away with rates higher on certain groups of customers.  The consumer groups noted that low-income customers – who have fewer market options due to geography, time available, and financial literacy, tend to shop less than wealthier consumers.  These low-income consumers are the ones most harmed by price optimization.

You can say one thing in defense of traditional "dynamic pricing" websites: Sleazy as it was when (for example) certain businesses used dynamic pricing to charge Mac users higher prices than PC, at least those companies sought extra money out of people they figured were most able to afford it, rather than soaking those least able to absorb the extra costs.

Have your car insurance rates gone up? Unless you live in California, the answer is almost surely yes.  

You might wonder how that's possible. Surely the loss rate from thefts, accidents and so forth is higher in Los Angeles and San Francisco than in Wichita or Rapid City.

Well, the answer is that California voters, using their powerful initiative process, decided in 1988 that they had had enough of constantly rising auto insurance premiums and enacted tough new regulation of the insurance industry.

As a result, a Consumer Federation of America analysis finds, average California auto insurance expenditure declined between 1989 and 2010, while every other state in the nation saw substantial increases over that same period.

Not only have rates gone up more slowly in California than elsewhere, but auto insurance expenditures are now six percent lower in California than the national average and have declined steadily since 1989. 

Nationally, Americans spent $791 for auto insurance coverage in 2010, $240, or 43 percent, more than they did in 1989, according to the CFA analysis based on data collected by the National Association of
Insurance Commissioners.

Californians spent an average of $746 per year for auto insurance coverage in 2010, $2, or 0.3 percent less per year was spent in1989 without adjusting for inflation.

The analysis shows that, more than two decades later, California insurance costs are lower than twenty states and six percent lower than the national average, with California the only state to post a decline in auto insurance expenditures. 

Regulatory reforms

The savings in California are directly linked to the regulatory reforms of Proposition 103, approved by California voters in 1988, said J. Robert Hunter, Insurance Director for Consumer Federation of America. At that time, California insurance rates were the third highest in the nation and 36 percent higher than the national average. 

“No other state has put in place the kind of strong oversight that California voters created in 1988, and no other state has seen auto insurance prices decline,” Hunter said. “In California, as a result, Proposition 103 drivers are paying less for car insurance today than they were 25 years ago.”

Proposition 103, which took effect in 1989, created a “prior approval” system of regulation for most lines of insurance in California, including auto, homeowners, commercial and medical malpractice insurance. 

Under a prior approval system, insurance companies must present any rate change plan to the Department of Insurance and cannot implement any rate hikes or other changes without authorization from the Insurance Commissioner. 

“California’s version of prior approval regulation includes additional protections that have made the state’s insurance system much more effective than any other states’ systems,” said Hunter.

Whether it's auto, health, life or home, insurance coverage is expensive. If you could know what makes it more expensive, you might be able to save some money here and there.

Lynette of Boca Raton, Fla., said she and her husband have been insured with The Hartford, through AARP, for years. She was shocked when her rate surged.

“Many years with company never a late payment. Never a claim, no tickets, no accidents, clean driving record, no arrests,” Lynette wrote in a ConsumerAffairs post. “And a $600.00 increase! Their commercial says they will never drop you for any reason. But they sure know how to force you out!”

Credit score

Could there be a reason, unknown to Lynette, that caused her rate to rise? Kim Lankford, contributing editor, Kiplinger Personal Finance Magazine and columnist at Kilpinger.com, says there are five factors that may be obvious, or not so obvious, starting with your credit score.

“Insurance companies did studies and found that people with low credit scores were more likely to have claims than people with high credit scores,” Lankford said. “I think that's a big surprise to people because it doesn't seem obvious. It doesn't seem to have anything to do with driving.”

And some people don't think it's fair. It's prompted some states, like California, to impose regulations preventing auto insurance companies from basing rates on credit scores.

Driving record

What's not exactly surprising is that a car insurance company will base rates on your driving record. Pick up a few speeding tickets or get in an accident or two and you could see you auto insurance rates rise. And that's not all. Lankford says you could see an impact on your health insurance rate.

“When you think about it, when people get in a lot of accidents they can get hurt,” Lankford said. “Some health insurers will actually reject people if they've had a DUI in the last five years.”

The kind of car you drive is also going to make an impact on your auto insurance rates. In general, a four-cylinder car is less costly to insure than a six- or eight-cylinder car.

“Insurance companies are all looking at the claims different cars produce,” Lankford said. “They're slicing and dicing it in various ways, looking at the correlations between car models and claims.”

House history

Where you live will make a difference in your homeowners insurance rate. If you live in a part of the country prone to hurricanes, for example, you'll pay very high rates – assuming you can even get insurance. If you live in the country, far from a fire station, your homeowners insurance rates will be higher than if you live in a city.

But here's something you might not know. Your house's claims history – claims that were made before you moved in – will also affect your rates.

“This kind of makes sense, because if the house has problems that keep resulting in claims the insurance company is going to be concerned that that kind of thing is going to continue to happen and cost them a lot of money,” Lankford said, “So they're not just looking at your personal claims record but claims on the house.”

Co-workers can affect you

And speaking of things beyond your control, your health insurance rates will be affected by the age and health of your co-workers, especially if you work for a small company.

If you've been working at a tech start-up with a lot of young, healthy people, then your health insurance rates have been based on those demographics and they've probably been relatively low. But go to work where most employees smoke and are in their 50s and you'll face higher premiums.

In the end, it's a numbers game. Actuaries at insurance companies spend their entire careers looking for tiny statistical nuances that can predict the likelihood that someone will file a claim — and that can justify charging a higher premium. Knowing what those factors are may help you make smarter decisions.

Consumers spend hundreds of dollars a month for insurance coverage for their home and automobiles, so when damage occurs the first thought is to file a claim. That's why you pay those premiums each month, right?

However, in the real world that's not always the best course of action. Consider what happened to Ellen, a Farmers auto policyholder from West Bend, Wis.

“We have been paying for several years to insure a 2003 Mini Cooper and a 2010 BMW,” Ellen writes in a ConsumerAffairs post. “I recently backed into a car. The damage was not that great. In fact I paid out of pocket to repair my car.”

But the person she backed into filed a claim to have their car repaired. Ellen would have been better off paying for that damage herself too.

“Within a month of the incident our rate increased by $983 a year,” Ellen writes. “This was my first claim. I have not had any claims for over 10 years with any company. The increase was greater than the claim made by the car owner I hit. How can this be fair?”

Frank, an Allstate customer from New Jersey, says his auto policy was canceled after a minor at-fault claim and two non-fault claims.

“For six years I never was late on a payment, so total premiums paid for six years comes to about $25,000,” Frank writes. “Now I know they did pay almost $4,000 for my at-fault accident that I can't believe, because I backed up into someone who was five feet behind me and I had nothing but a scratch on my bumper. But because I had a little bad luck and someone else hit my wife's car and my son's car, that's reason enough to kick me to the curb.”

How it works

It doesn't seem fair, but unfortunately that's how the insurance industry works, especially now when publicly-traded insurance corporations seek to enhance their profitability by minimizing risk. By and large insurance companies don't bother to explain to consumers how their business works, so credit Most Insurance, an independent broker in Tampa, Fla., for making the effort.

“Insurance, and the price you pay for it, is based on risk – the risk of a loss occurring,” the company says on its website. “High risk of loss means higher prices are necessary to pay for those increased losses. And low risk of loss means lower prices. Now, what determines the level of risk? Lots of things. But claims experience is one of the most important.”

The company says that the numbers show that people who have made a claim are more likely to have another claim in the future. If you have a claim on your record, you're going to look like a bigger risk compared to a consumer with no claims.

Avoiding claims will probably pay off

If you have an accident and can avoid filing a claim, it just might pay off in the long run. But how do you know when you really should file a claim and when you should just pay for the damage out of pocket? Some industry experts suggest keeping the damage repair off the insurance company's record books if the damage is under $1,000. However, if you can afford to pay more out of pocket, that number should probably be a bit higher.

It's useful to remember that the real purpose of an insurance policy is to protect you from catastrophic loss – the kind that could force you into bankruptcy. If you can afford to cover your own damage, and damage to the other party, it might be the smart thing to do.

Consider covering the cost yourself if there is no other party involved. Asking your insurance company to pay for the repair to your car when you backed into a telephone pole will probably cost you in the long run. Yes, they may pay your claim but you may find yourself dropped as a client when the policy comes up for renewal or paying a higher rate.

Don't ask, don't tell

If your are uncertain about whether or not to file a claim, your insurance agent may be the wrong person to ask. It's quite possible that the agent will be required to note in your file that you had an accident, even if you don't file a claim.

While all of this seems vastly unfair to consumers who are required by law to pay monthly premiums for the privilege of operating a vehicle, deciding to “self-insure” for all but the most serious accidents can work in your favor. Insurance policies carry “deductibles,” the amount of damage the client agrees to pay before the insurance company begins to pay. The higher the deductible the lower the premium.

If you have already decided that you are going to file a claim only for major damage, it makes financial sense to take the largest deductible the company provides. That way you save on the monthly premium and can apply the savings toward covering damages, when or if you get in a fender-bender.

If you're paying more for car insurance and have had no accident or tickets, maybe you should check your credit score. In all but a handful of states, your credit history is part of the formula used to set your rate.

According to esurance, a web-based insurance provider, the practice stems from a 2003 study by researchers at the University of Texas. They found that consumers with lower credit scores tended to be involved in more car insurance losses and higher claims – meaning they were a greater risk.

A 2007 study by the Federal Trade Commission (FTC) found pretty much the same thing, drawing a strong reaction from a number of consumer groups. They cited other studies that found tying insurance rates to credit scores tends to discriminates against low income and minority consumers because of the racial and economic disparities inherent in scoring.

3 states ban it

If you think that linking credit histories to insurance rates doesn't seem fair, the state legislatures in California, Hawaii, and Massachusetts agree. They have passed laws preventing insurance companies from using credit scores – or “credit-based insurance scores,” as esurance calls them – as part of the rate formula.

Some insurance companies weight this credit data more heavily than others, so a consumer with a spotty credit record would want to avoid companies that place a lot of stock in credit history and go with one where it seems to matter less.

The financial website WalletHub.com said it obtained quotes from five of the largest car insurance providers for two hypothetical consumers – one with good credit and one with no credit history. What did it find?

Among the five insurance companies Allstate appeared to rely most on credit history. The study found a 116% swing in premiums between the good credit/no credit consumers.

At the other end of the scale, State Farm appeared to rely least on credit history. The difference was still significant, but was only 45%.

The differential differs state to state. In the average state the study found a 65% differential in the cost of car insurance premiums for a person with an excellent credit score and a person with no credit history.

Transparency

Some insurance companies are more upfront about their use of credit data in setting rates. Progressive, for example, was found to be the most transparent, scoring a perfect 10 in that category. Liberty Mutual was the lowest-scoring provider, logging a rating of 4.5.

Back to esurance's point that companies don't use your credit score but use the data to create their own insurance credit score. That's technically true and may explain why there appears to be such a variation of rates in the WalletHub study.

According to Credit Karma, different companies calculate their scores in different ways. But the bottom line – with most companies your credit history is a significant factor in determining your rate, sometimes just as important as your driving record.

Whether or not you think that's fair, it's a fact of life, to one extent or another, in all but 3 states. Your best defense is to try to improve your credit score if you have a less than stellar record. Or move to California, Massachusetts or Hawaii.

A few weeks ago the Consumer Federation of America, working in conjunction with the Center for Economic Justice, called on insurance regulators to stop the practice of “price optimization” -- basically, insurance companies charging certain customers higher premiums not to reflect higher levels of risk or rates of coverage but simply because the (usually low-income) customers didn't realize they qualified for a better price.

Coincidentally (or maybe not), on April 23 the CFA said that an analysis of year-2013 financial data for property/casualty insurers in the United States showed that last year, “insurers enjoyed extraordinarily high returns on the highest level of annual premiums ever paid by United States consumers, businesses and public agencies,” with total annual profits of $64 billion, the third-highest in history even after adjusting for inflation (dwarfed only by the years 2006 and 2007).

J. Robert Hunter, who is the CFA's Director of Insurance (and a former Texas insurance commissioner) said, “The data make it indisputably clear that insurance companies are overcharging their customers in order to rake in huge profits.”

Squeezing so much profit

Hunter later said that “It is good for the P/C industry to make fair profits, but it is unacceptable for insurance companies to be squeezing so much profit out of consumers who are required by laws and financial institutions to buy coverage. At a time when low- and moderate-income Americans are increasingly unable to afford unfairly priced auto insurance and many homeowners struggle to afford home insurance in many parts of the nation, huge profits like those realized in 2013 raise serious questions about the adequacy of state regulation of insurance.”

The CFA also said that the current $653 billion surplus held by insurance companies is the higest in history, even adjusted for inflation.

The full CFA release is available as a .pdf here.

CORRECTION 7/22/2014: Although our story published July 16 correctly quotes the lawsuit, the lawsuit misstates the defendant. The correct defendant should have been Direct Auto Insurance Company, 330 S. Wells Street, Suite 910, Chicago, Illinois, 60606.  Direct Auto Insurance Company is not and has never been affiliated with Direct General Insurance Agency of Tennessee, Inc., d/b/a Direct Auto Insurance or any other member of the Direct General Group of Companies.

Direct Auto Insurance Agency issued the following statement:

Direct General Insurance Agency of Tennessee, Inc. and its affiliated insurance agencies, d/b/a Direct Auto Insurance, 1281 Murfreesboro Pike, Nashville, Tennessee, is proud of its reputation and the services it provides to the thousands of customers who rely on Direct Auto Insurance for their auto insurance needs. The company has spent years building its brand and creating awareness of its name, logo and advertising images.

A class-action lawsuit was filed in Cook County Chancery Court naming as the defendant “Direct General Insurance Agency of Tennessee, Inc. d/b/a Direct Auto Insurance Company.”  However, the plaintiff named the wrong party.  The actual defendant should have been Direct Auto Insurance Company, 330 S. Wells Street, Suite 910, Chicago, Illinois 60606.

Direct Auto Insurance Company is not and has never been affiliated with Direct General Insurance Agency of Tennessee, Inc. d/b/a Direct Auto Insurance or any other member of the Direct General Group of Companies. Direct General Insurance Agency of Tennessee, Inc. and its employee agents have never produced business for Direct Auto Insurance Company. The allegations in the lawsuit are not applicable to Direct General Insurance Agency of Tennessee, Inc., its employee agents or affiliates. Accordingly, Direct General has requested that plaintiff’s counsel dismiss Direct General from the lawsuit and believe that they will do so. In the event that does not occur, Direct General will be submitting a filing with the court for the company to be dismissed from the suit.

Regrettably, images of the logo and advertising associated with Direct General Insurance Agency of Tennessee, Inc. d/b/a Direct Auto Insurance have been incorrectly used by certain media outlets to illustrate news stories about the lawsuit without first consulting the company.

“There has been confusion in the past about the two companies with similar names, which translated most recently into this lawsuit that incorrectly names Direct General Insurance Agency of Tennessee, Inc. d/b/a Direct Auto Insurance as a defendant. Many media outlets then began reporting this error using our company’s logo and advertising images. Because we were not provided a chance to address the error prior to its distribution, the company must now insist on corrective action. We are in the process of having our name removed from the lawsuit, and we request that the reported misinformation be corrected as quickly as possible so there is no confusion in the minds of consumers,” said John Arena, Senior Vice President and General Counsel, Direct General Group of Companies.

About Direct Auto Insurance

Direct General Corporation is an insurance holding company and through its subsidiaries, is a leading provider of personal auto insurance, life insurance, and vehicle, and accident protection plans. Direct is headquartered in Nashville, Tennessee, and has more than 400 local offices in 13 states primarily the Southeast with annual revenue of over $450 million. Direct markets and sells its products and services under the Direct Auto Insurance brand through its retail store outlets, by phone through its call center and via the internet.

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The original story:

A class action suit in Chicago's Cook County Court charges that Direct Auto Insurance targets low-income minorities for its "worthless" car insurance policies, profiting from the premiums but refusing to honor claims, Courthouse News Service reports.

"Direct Auto Insurance Company developed a business strategy wherein the company planned to secure customers by offering auto insurance at premiums that were substantially lower than its competitors and market rates," said lead plaintiff Norbert May in her complaint.

"Direct Auto Insurance Company intentionally targeted consumers with low to moderate incomes, including a high percentage of African-American and Hispanic individuals, who did not have the financial ability to hire legal representation to defend them against defendant's predatory practices," May alleged.

The suit charges that Direct Auto's policy of filing meritless declaratory judgment actions on the basis of misrepresentations in policy applications shows that the insurance company never intended to honor any claims on the policies it issued.

May seeks class certification and damages for fraud, breach of contract, and alleged violations of the Illinois insurance code. 

May is represented by Edward McCauley with Kelleher & Buckley in North Barrington, and Daniel Konicek with Konicke & Dillon in Geneva.

J. Robert Hunter, Director of Insurance at CFA and former Texas Insurance Commissioner, says it's never been more important to shop around for insurance.

“You may have been with your auto insurance company for many years. You may even receive a loyalty discount of five or ten percent on your bill. You have filed few or even no claims during your years with the insurer. You are a great customer and it may seem that there’s no reason to complain about your auto insurance," Hunter said, warning that it's just such customers who are targeted by rate increases.

“Watch out! Your insurer may be increasing your premium by far more than your loyalty discount, precisely because you have been so loyal. Even if you have a perfect driving record, many insurance companies are raising rates on people just like you – people who do not shop around," he said. "Newly revealed insurance practices show that reasons you might be vulnerable to price increases are such things as staying with one insurer for many years, never calling the company with complaints or simply buying your insurance through an agent rather than online.”

Are you being PO-ed?

The name insurers use for such practice is “Price Optimization,” referred to as “PO.”

The industry uses personal consumer data and statistical models to measure how likely each customer is to shop around and how much of a price increase he or she will tolerate, Hunter said. After determining what economists call the “price elasticity of demand,” insurers push up premiums based on how unlikely it is that a customer will shop around for a better price, even if the driver has never caused an accident or been issued a ticket.

Many insurance companies, including about half of the larger ones, raise a driver’s premium if they conclude that the driver is not likely to leave their company, the CFA reported. This means millions of drivers are possibly being charged a premium that is higher than the amount considered appropriate and fair for their risk profile.

What should a consumer do?

The best defense against being PO-ed is to shop around, according to Hunter. 

“Even before the advent of price optimization it was very important to shop for insurance since prices vary so widely. But now, to avoid being POed, shopping is critical,” Hunter said.

Hunter said consumers should also call their state’s Insurance Commissioner and tell her or him to stop insurance companies from using this Price Optimization scheme to unfairly raise rates on customers.

There often seems to be little rhyme or reason to auto insurance rates. If you drive a sports car, have had a couple of claims or a speeding ticket or two, you understand why your rate may be higher than average.

But other reasons for a high insurance bill aren't always so clear cut.

The fact is, insurance companies take many things into consideration when setting individual rates. The Consumer Federation of America (CFA) says some of them aren't fair to consumers and the group will lobby for reform.

CFA has seized on a new report by Bankrate.com, illustrating how living in a particular ZIP code can affect what you pay for auto insurance. The report notes you can get vastly different quotes from the same insurance company at two addresses a relatively short distance apart but in different ZIP codes.

Illegal in California

This is not exactly new information. In fact, California bars insurance companies from using ZIP codes as a factor in setting auto rates. But CFA says the Bankrate report underscores the extent to which other states allow the practice and the extent to which it can make a difference in what consumers pay.

For example, in one extreme example a 30-year-old Chicago are man could pay 64% more for the exact coverage as another 30-year-old man who lived three-tenths of a mile away but in a different ZIP code.

CFA notes that insurance companies claim that the use of ZIP codes is related to actuarial loss data, but argues that whatever differences there might when comparing dense neighborhoods with sparsely populated communities cannot account for dramatic price differences being charged to drivers on different sides of a street.

"State laws require that every driver has to buy auto insurance, no matter where they live," said Stephen Brobeck, Executive Director of CFA. "So how can it be fair that insurers charge the same person radically different rates for moving just a few blocks away?"

Impact on low-income consumers

CFA says it has researched the cost of auto insurance and its impact on low to moderate income consumers. It concludes that in many low-income communities across the country, good drivers have access to few or no policies that cost less than $500 per year, which meets the standard of a reasonable price for basic insurance coverage.

It says it has also found 100% premiums spikes for good drivers with low credit scores, another metric insurance companies use to assess risk when they set rates. A recent CFA report found that some large insurers do not even consider mileage when setting auto premiums.

Trying to predict what your auto insurance premium will be isn't always easy. A recent study by personal finance website WalletHub.com found some factors you would expect to impact insurance costs didn't.

The price of the car, for example. The study found cars in the same price range could have a difference in premiums of up to 39%.

Price optimization

Price optimization is another way insurance companies set rates, and it is a practice that California is also targeting. Price optimization is a technique by which insurance companies measure the shopping habits of its customers in order to set individual premiums as high as possible regardless of a customer's risk profile.

In other words, long-time customers who do not shop other car insurance rates tend to be charged higher rates.

In February California's insurance commissioner sent notices to more than 750 insurance companies they must end that practice in the state within 6 months.

In 24 of 50 urban regions, there was at least one lower-income ZIP code where annual premiums charged by all of the five largest auto insurers exceeded $500. In nine of these 50 areas – Miami/Ft. Lauderdale, Detroit, Minneapolis/St. Paul, Tampa/St. Petersburg, Baltimore, Orlando, Jacksonville, Hartford, and New Orleans – prices exceeded $500 in all lower-income ZIP codes.

 In the report, CFA analyzed 81,000 premium quotes for State Farm, Allstate, Farmers, Progressive, Geico and each of their affiliates in all ZIP codes in 50 large urban regions, which include urban, suburban and adjacent rural communities.

“Our research raises important questions as to whether state-mandated auto insurance is priced fairly and is affordable for many lower-income Americans,” said Tom Feltner, CFA’s Director of Financial Services and the principal author of the report. “Drivers need a car to get to work or school. High insurance premiums act to deny these Americans economic opportunity and also help explain why so many lower income Americans drive without insurance.” 

CFA also released findings from a recent national survey by ORC International indicating that more than three-quarters of Americans (76%) believe that a “fair annual cost” for state-mandated insurance for a typical good driver with no accidents and no tickets should be less than $500, while two-fifths of Americans (40%) think that this driver should pay less than $250 per year.

In previous studies, CFA has found that insurers use rating factors, such as education and occupation, that tend to disadvantage low- and moderate-income drivers.

In the latest study, CFA reviewed January 2014 data on auto insurance premiums charged to a good driver – a 30-year old, unmarried woman, with a high school education and clerical job who rents her home and has a “fair” credit-based insurance score (the middle category of a 10-category range from excellent to poor) – from Quadrant Information Services for all U.S. ZIP codes.

CFA then analyzed the data focusing on annual premiums charged by the five largest auto insurers – State Farm, Allstate, GEICO, Farmers, and Progressive (who, together write 54% of premium in the U.S. auto insurance market) – in 50 large urban regions and further broke out the prices charged in those areas’ 1,377 low- and moderate-income ZIP codes (with median household incomes below about $40,000).

Action needed

The report notes that the majority of drivers in the lowest-income ZIP codes reviewed earn less than $21,000 per year, making even a $500 policy a difficult financial burden.

CFA urged federal and state regulators to thoroughly investigate the issue and help ensure that state-required auto insurance can be afforded by lower-income Americans with good driving records.

“CFA commends the Federal Insurance Office for initiating an investigation of auto insurance affordability by lower-income Americans,” said J. Robert Hunter, CFA’s Director of Insurance and former Texas Insurance Commissioner. “We are hopeful that the FIO will gain access to data on prices quoted and charged by insurers to help determine insurance affordability,” he added.

Lower-income consumers are being unfairly gouged for car insurance, a study by the Consumer Federation of America (CFA) finds, contributing to the high rate of uninsured drivers and restricting economic opportunities.

The study found that annual auto insurance premiums are especially high for the estimated 8 million low- and moderate-income drivers who finance their car purchases. These drivers must purchase the comprehensive and collision coverage required by auto lenders in addition to the liability coverage required by states.

In the 15 cities CFA surveyed, annual premium quotes by the nation's five largest auto insurers -- State Farm, GEICO, Allstate, Progressive, and Farmers -- were almost always more than $900 and were usually more than $1,500.

In a related national opinion survey undertaken by ORC International for CFA, nearly four-fifths of respondents (79%) said that a fair annual cost for this auto insurance coverage was less than $750. One-half (50%) said that a fair annual cost was less than $500.

“High auto insurance premiums represent a huge barrier to car ownership, and economic opportunity, for millions of lower-income Americans,” said Stephen Brobeck, CFA’s Executive Director. “Researchers agree that they and other Americans, even those in large cities, gain access to better jobs and other opportunities through access to a car,” he added.

The report faulted state governments for allowing major auto insurers to charge higher premiums based on income and other factors not directly related to safety.

“State governments, which require drivers to purchase auto insurance, have a special responsibility to ensure that this insurance is affordable in an auto-dependent society,” said J. Robert Hunter, CFA’s Director of Insurance and former Texas Insurance Commissioner. “These governments should create low-income programs that pay for themselves, such as California’s, and also end well-documented price discrimination against lower-income drivers.”

For more than a decade, California has made available liability coverage to good lower-income drivers for $226 to $338 a year, depending on county of residence. By law, this program is required to charge premiums that cover claims paid, so is not subsidized by taxpayers or other drivers.

GEICO the lowest

GEICO tended to charge the least (e.g., 6 of the 8 quotes under $900) while Farmers tended to charge the most (e.g., 12 of the 16 quotes over $3,000).
Within individual markets, huge price ranges typically exceeded 100 percent.

“Any economist will tell you that price ranges greater than 100% for essentially the same product reveal lack of true price competition,” noted CFA’s Brobeck.

“As well as denying economic opportunity, these high premiums pressure many lower-income drivers to break the law by driving without insurance,” Hunter said. “We’ve estimated that one-quarter to one-third of these drivers have let their policies lapse or never purchased them in the first place, because they confront the Hobson’s choice of paying for insurance or more basic necessities like food, rent, or electricity.”