The advertising makes sense: according to television commercials, consumers with fewer accidents get the best rates from insurance companies. However, The Consumer Federation of America (CFA) recently conducted a study which yielded surprising results. Safer drivers are often charged more than those who recently caused an accident. In addition, those safe drivers are usually at lower income levels.
The CFA says that this confusing practice is common, and that insurers use education and occupation to assess risk and arrive at insurance policy costs. Not surprisingly, a survey done by the CFA in 2012 found that two-thirds of Americans believe this practice to be unfair. Of course the industry denies any unfair practices.
The CFA visited websites of the largest insurers: State Farm, Allstate, GEICO, Farmers and Progressive to find minimum liability coverage for two hypothetical customers: a high school receptionist and an executive. Both are middle income women, 30 years old, with ten years driving experience. They live on the same street in the same zip code. The receptionist is a single renter with no accidents or violations whose insurance lapsed for 45 days. The executive is married with a master’s degree with no insurance lapses but caused an accident worth $800 in damage in the last three years. The research was done for both women in 12 cities.
The CFA found that two-thirds of the sixty rate quotes received were actually lower for the executive, even though she had an at-fault accident, often by more than twenty five percent.
When asked by the Insurance Information Institute about the fairness of this test due to the break in coverage (which can be seen as a risk factor), the CFA answered that the receptionist had no car for the forty five days of the lapse, so she didn’t need insurance. How does that make her a risk?
In all fairness, there are some factors that everyone agrees may flag a consumer as a higher risk. These factors include type of vehicle, age, sex and driving history. Other factors such as education and credit score have some arguing about how fair the process is to those lower on the socio-economic ladder.
Michael Barry, vice president of media relations at the Insurance Information Institute has this to say on the subject: “These factors have been found to be actuarially sound ways to assess risk. And before they are ever used, these rating criteria are vetted by state insurance regulators who have allowed them.”
Robert Hunter, CFA Director of Insurance and former Texas Insurance Commissioner, says, “Our concern is that these factors are not proven; there is no logical reason to explain why they should work. The insurance companies say there’s a correlation, and that’s all they need.” The CFA goes on to argue that especially in this economy, credit score is a terrible way to assess risk. Consumers who have wound up with less than perfect credit but are still perfectly safe drivers should not be penalized due to circumstance.
Some states such as California and Massachusetts restrict or disallow the use of socio-economic factors in auto insurance risk assessment.
So what does this mean for the consumer? What can you do to ensure you are not being assessed (negatively and possibly unfairly) by auto insurance companies?
First, remember that there is fierce competition among auto insurers for your business. Rates can vary by hundreds of dollars, and the best thing to do is your homework. Visit the state insurance department website and look at the details. Find the comparison charts for your area for people who are similar to you. This is an easy way to see how the different companies compare to each other and which companies are best suited for your needs and might offer you the best quotes.