Are lower income families unfairly treated by insurers? Or are cheap auto insurance rates the responsibility of the insured?
No matter how you feel about your insurance premium, remember this—it could always be worse.
According to the Consumer Federation of America, a recent study claims the rating practices of insurance companies are making auto insurance near impossible for low to moderate income families to afford. The CFA further claims that this kind of expense causes the families mobile inflexibility, thereby reducing their chances of getting better paying jobs.
The report was backed financially by The Ford Foundation, and the study’s research was done by the Executive Director, Stephen Brobeck and Director of Insurance, J. Robert Hunter. Hunter used to be an insurance commissioner in Texas and also a federal insurance administrator.
The CFA report says that insurance legislation could be doing more in order to make sure auto insurance is affordable. The CFA proposes that if more people had access to affordable insurance, then they could gain opportunities like owning a car and getting to better jobs.
However, those in the insurance industry are dismissing the study and the claim that the lack of affordable auto insurance is causing any kind of economic domino effect.
The Insurance Information Institute said in a press release that they “vigorously contested” the study, and claim that cheaper auto insurance rates are accessible to anyone and becoming more affordable.
However, Brobeck claims that there’s unequal treatment by insurers. In his statement Monday, he said that insurance companies are more interested in selling insurance to families with higher incomes and failing to provide adequate coverage to lower income families.
The report also stated that insurers are aware that higher income families are likely to have more than one luxury vehicle or more expensive vehicle, all carrying comprehensive coverage, while low to moderate income families are often just purchasing insurance to be able to legally cover an older vehicle. The report hypothesizes that insurers earn more money on a per policy basis when selling policies to higher earning families, especially because insurers have a greater chance of selling multiple lines of insurance.
Insurance companies often advertise a “multi-policy” or “multi-line” discount, which provides a discount of sometimes up to 10% on both policies. If an insured buys their auto insurance and homeowners insurance with the same company, they can often receive this discount. According to the CFA’s study, this is basically deemed an unfair practice, as low to moderate income families are less likely to own a home or purchase a second line of insurance.
The study also claimed that lower income families are paying around 8% of their income towards auto insurance.
The study points out that since insurers have surcharges for things like lapses in coverage and for lower credit ratings, that lower income families are being penalized. A driver with one of these factors will often be placed in a “non-standard” rating tier, which often leads to higher premiums and surcharges.
Non-standard insurance is a special rating tier usually reserved for drivers who have had major violations or lapses in insurance. Often their rates are higher, as most of the drivers have had violations such as DUIs or lapses in coverage, which alone can cause a rate increase of sometimes two or three times what the premium would be with a standard company. Therefore, this practice could lead to vicious cycle for an insured: if a driver with a lower income is unable to afford their auto insurance premium and lets their policy lapse, when they attempt to purchase insurance again, they’re charged more in premium for having a lapse in coverage, leading to an even higher premium.
However, whether an insured obtains coverage in a standard or non-standard tier doesn’t mean all policyholders aren’t offered the same discounts, or at least discounts that would “even out” the prices.
Many insurance companies do offer ways lower earning families could get a multi-line discount. In fact, even those who may be insured by a “non-standard” company — which offers rates many would describe as the opposite from cheap — have opportunities to get a wide array of discounts.
A representative from Victoria Insurance, a non-standard company owned by Nationwide Insurance, stated that even if a policyholder is not eligible for standard lines of insurance, there are still discounts that may apply to them.
“If a customer has an auto policy with us and a homeowners or renters insurance policy with Nationwide, we still offer them a multi-policy discount. We also offer a multi-car discount for customers who insure more than one vehicle,” the representative told me.
According to the Insurance Information Institute, the average price of auto insurance annually currently $795 a year, so what’s deemed “affordable” or “cheap” by insurers is subjective.
If insurance companies offer the same discounts across the board, it seems likely that the premiums would at least average out when compared against the insured’s income.
Many in the insurance industry are adamantly denying the claims the study presents. In a statement to the Insurance Journal, Jim Whittle, the assistant general counsel and chief claims counsel for the American Insurance Association, said he thinks the study and the CFA’s statements have “malicious intent.”
Whittle believes the study has many inaccurate assumptions, and these assumptions both point a finger at insurance companies. He said the study not only makes assumptions about the way insurers determine rates, but that the study also questions the intentions of the insurance industry itself.
Whittle is referring to the study’s claim that the actuarial practices behind insurance company’s rating practices is partially to blame for “disparate treatment,” as the study calls it. In the rating process, many different factors are considered, including things such as where an insured lives, how often they drive their vehicle, whether it’s used for work or pleasure, and also one’s own credit score. Brobeck has made claims that these factors are unfairly used by insurers, and where an insured lives can negatively impact their rate.
Brobeck’s statements hint at the fact that insurance rates are higher for those who live in low income neighborhoods, but some from the insurance industry say these factors are absolutely justifiable in use.
Whittle says that there are reasons for using those factors in the underwriting process though, and that there are reasons why premiums may be higher for some. He points out that if an insured lives in an area with higher crime rates, a higher population, or large number of vehicles, then the risk obviously increases and is then reflected in the premium.
The CFA is hoping the study will result in three things, which state insurance commissioners would be responsible for implementing:
- Creation of low-income insurance programs
- Eliminate what the study calls ‘disparate’ treatment
- Lower the minimum liability coverage requirements
In his statement to the Insurance Journal, Whittle said, “From the information they received, they assume a malicious intent. But there are perfect good, actuarially justifiable reasons why differences may exist.”
-Desiree Baughman, InsuranceQuotes.org, @DesireeDB
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