PhotoJane of Woodruff, Wis., thinks auto insurance should be like peanut butter: if you have the money to buy it, your credit rating shouldn't affect the price.

"My credit rating is not correct. In any case it has nothing to do with my buying insurance, not any more than my going to the store and buying peanut butter. I get the peanut butter if I pay for it, the same with insurance," Jane said in a recent ConsumerAffairs posting about her insurer, Progressive. "It's distortion for a state to demand we have insurance and then companies like these profit without control."

Unfortunately, Jane is not alone. Millions of consumers pay more for their car insurance because of factors that consumer advocates say have nothing to do with actual risk factors.

It's mandatory

Since states require drivers to have insurance, consumers feel that the price of that insurance should be regulated so that it is fair for all.

Technically, that's how it's supposed to be. Auto insurance companies are required to sell policies to any driver without discrimination, at least, barring certain conditions where drivers with egregious offenses may need to purchase a policy through state programs. After all, auto insurance is mandatory for practically all U.S. drivers.

For their part, car insurance companies state flatly that race and income level play no part in policy premium valuations, but some consumer advocates are telling another story, one that is a bit more detailed and shows that there’s more than one way to block drivers from the auto insurance market.

Earlier this year, the Consumer Federation of America released an extensive study of what it calls “disparity” in auto insurance markets. What it found may be troubling to many who either struggle with high auto insurance costs, live in low income neighborhoods, or advocate for the working class American.

One thing that the CFA study points out is that many insurers lower their involvement in areas that they consider higher risk by clustering their offices in desirable neighborhoods, to the extent that some low income neighborhoods and zip codes suffer from the “desert and oasis” effect common to urban food distribution models and other retail placement systems.

That means residents in these communities have fewer choices for shopping around to get lower rates, but the issue of choice does not seem to be the primary problem.

The CFA study also cites a big difference in what the average low income driver will have to pay for a policy, a difference of up to $1,000 annually for a comparable policy. Citing annual premiums as high as $4,000 to $5,000, the study's authors suggest that many low income drivers are being priced out of the market.

Nuanced problem

In order to achieve this difference, according to the CFA report and other analysis, insurers use other demographic information that ties into the primary identifiers of race and income, making the disparity a very nuanced problem. One example is education: insurers use level of education as a risk factor, which obviously is going to result in higher premiums for lower-income drivers, since it requires a lot of capital to get an advanced degree, which in turn usually results in greater earning capacity.

The use of identifiers like level of education has sparked a hot  debate about whether it is fair to consider seemingly unrelated issues such as academic achievement and financial background in risk assessments; another very controversial practice is the use of a driver’s credit score.

Proponents of these practices would argue that a higher education encourages a driver to make smarter choices; the reasoning for using a credit score is more convoluted, where it might be suggested that a person with bad credit is “careless” and may be more inclined to cause an accident.

Other who oppose these data link-ups argue that they are discriminatory, not just because they punish low-income drivers disproportionately, but because they assume a level of knowledge about an individual that may not be founded in fact.

Regardless, insurers have been free to use these types of data in policy valuations, which is what leads some critics of the industry to claim that auto insurance rates are not only higher for low income drivers as a whole, but for some ethnic groups. African-Americans, say consumer advocates, tend to pay more for auto insurance as well, because of many of the same issues of data correlation.

State initiatives

For those who despair about the high rates that unfavored drivers may be asked to pay, there’s some light on the horizon in the form of new state programs. For example, in 1999, the state of California created the California Low Cost Auto Insurance program that subsidizes rates for some low-income households.

California’s State Department of Insurance says that the program was “designed to provide income eligible persons with liability insurance protection at affordable rates as a way to meet California's financial responsibility laws.” It helps many thousands of Californians to afford something that they need, and makes everyone on the state’s roads safer from the financial problems related to a collision with an uninsured driver.

Automakers occasionally try to make it easier for their customers to get insurance. Last year, on a test basis, General Motors offered detailed collections  to car buyers in Washington and Oregon but there has been little long-term help from the auto industry.

Are some companies better than others?  Maybe, although the state-by-state nature of insurance regulation makes it difficult to generalize. What is certain is that some states are more aggressive in protecting insurance customers than others. 

Find more information in our Auto Insurance section.

At ConsumerAffairs.com, we follow detailed collections in order to help individuals and families get the best policies for their needs. We also keep detailed collections of consumer complaints about the big auto insurers who use these kinds of tactics to drive up prices. Look for more on how the car insurance industry works and shop around for a reasonably priced policy.

 


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