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In recent years, many American states have introduced legislation that would stop auto insurance carriers from using profession, credit score, and amount of education in factoring car insurance premiums.
California, Hawaii, and Massachusetts already took proactive steps to eliminate the use of credit scores when determining auto insurance costs.
In addition, Pennsylvania, Ohio, Maryland, Indiana, Florida, and California previously proclaimed that insurance carriers may not utilize “price optimization” in setting car insurance prices. This ended the practice of evaluating competitors’ prices or consumer data to decide whether a driver is prone to shopping for coverage among different carriers.
So why are state legislatures concerned about these different insurance practices?
After all these years, what’s the problem with using these traditional methods to determine risk and pricing?
If all drivers are asked to submit the same information then what’s the issue? The following CBS news report will give you an idea.
Critics of Common Car Pricing Methods
According to J. Robert Hunter, Director of Insurance for the Consumer Federation of America (CFA), the use of credit score, education, and profession by insurance carriers is discriminatory.
CFA and other industry organizations believe this is true because studies have shown using such data disproportionately increases premium costs for low-income drivers.
Critics of these factoring methods believe the best, most fair approach is for insurers to use a consumer’s driving record as the main influence over pricing rather than judging applicants based on income or education.
When insurance companies put the main emphasis on how much money an individual makes then low-income customers end-up with overpriced auto insurance. This is very unfortunate especially when the customer is a good driver and presents a very low risk to the carrier.
In addition, insurance critics point out that wealthy drivers frequently secure lower cost car policies than their less fortunate peers, even when they have moving violations and other convictions on their Motor Vehicle Record (MVR).
Consumer advocates claim that many of these common pricing methods are hurting poorer drivers because poorer drivers often have low credit scores, lack education, or live in high crime communities with a higher risk for vehicle theft or damage.
Advocates of Common Car Pricing Methods
Auto insurance carriers say financial risk is a reasonable factor to consider when setting policy pricing. Therefore, the use of a customer’s credit score or occupation is necessary to evaluate the individual’s fiscal responsibility.
Furthermore, insurers claim that price optimization has, in fact, lowered insurance premiums and will most likely give rise to an enduring industry-wide price stabilization.
Insurer advocates, such as the Insurance Information Institute, attest to a consistent decline in auto insurance premiums for everyone, including low-income and moderate-income drivers. These advocates also strongly disagree with state governments attempting to eliminate credit scores and other factors from pricing models.
The Consumer Reports Study
Consumer Reports recently completed a study of auto insurance quotes from 700 different carriers. The study’s results actually indicated there is truth to what insurance critics and state legislatures are saying about auto insurer’s premium formulas.
Consumer Reports’ study revealed that insurance companies regularly overlook a consumer’s driving history and instead evaluate drivers mainly based on their tax bracket.
The survey’s biggest proof of this discrepancy was that motorists who had exceptional credit scores and a DUI conviction paid less auto premium than motorists who had excellent driving records but low credit scores.
Norma Garcia, Consumers Union Attorney (a division of Consumer Reports), asserts that this isn’t only about car insurance pricing but consumer fairness, in general.
Garcia points out the obvious, that having a drunk driving conviction means you are probably a higher risk driver than someone with a low credit score.
Insurance advocates claim it’s difficult to emphasize driving history when quoting policy pricing. The reason they give is that many state databases do not have complete MVRs available. Often crash reports and moving violations are not included.
The Insurance Research Council Study
The Insurance Research Council published research indicating car insurance is now less costly for motorists at every income level.
The study showed insurance pricing now down overall (from 2% in the 1990s) to 1.5% of a consumer’s annual earnings.
However, once you take a closer look at the details of the Insurance Research Council’s results, it becomes clear there is a large discrepancy between what rich versus poor drivers pay in auto premiums.
- For high earners, 1% of their annual income is spent on car insurance premiums.
- For low earners, 3.5% of their annual income is spent on car insurance premiums.
Insurance company critics use the Council’s data to support their opinion that insurers are not doing all they can to price fairly.
The California Prototype
California has created an impressive auto coverage prototype for other states to consider when reviewing their own regulations.
In 1988 California’s Proposition 103 was adopted into law. Prop 103 required that all auto insurers in California prioritize these three elements: years of driving experience, motor vehicle record, and total miles driven annually.
Furthermore, Prop 103 states that any optional factors utilized by the insurance company cannot be of higher consideration than the three primary elements referenced above. This keeps the emphasis on the motorist’s driving risk rather than their financial risk.
The Golden State also created a low-cost auto coverage policy for underprivileged motorists.
Plus, in January 2019, California became the first state in 30 years to pass a gender neutral insurance regulation. A handful of other U.S. states, such as Pennsylvania, North Carolina, Montana, Massachusetts, and Hawaii, also have gender neutral insurance regulations, some have been in place as far back as the 1970s.
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