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Is the price right? The Federal Insurance Office is delving into the issue of the affordability of auto insurance.

Do Americans pay too much for auto insurance?

If they are poor, then the answer is "yes," some consumer advocates say.

Rich or poor, the answer is "no," most property/casualty insurers say. Although some consumers may think they are paying too much, Americans pay substantially less for auto insurance than they do for all other necessary and discretionary expenditures.

Plus, for the past dozen or so years, their rates actually have been going down. In other words, consumers aren't paying too much, and what they are paying is fair.

Since April, when the Federal Insurance Office announced its intention to monitor the extent to which traditionally underserved communities and consumers had access to affordable auto insurance, stakeholders on both sides of the debate have been sharpening their arguments.

The federal agency, citing its authorization under the Dodd-Frank Wall Street Reform and Consumer Protection Act, asked industry, advocates, academics and others for feedback on defining "a reasonable and meaningful definition of affordability" and the metrics and data the agency should use to monitor the extent to which minorities and low- and moderate-income people could afford auto insurance.

The FIO's request for information drew 20 comments and variants of two contrasting points of view.

Here are some excerpts from both sides of the debate.

* "PCI offers another definition for the affordability of auto liability insurance: 'Auto liability insurance is affordable if its price does not incur any financial difficulties greater than the costs of other necessities.' In this context, the cost of auto liability insurance is seen to be the lowest among the costs of all living essentials."

--Property Casualty Insurers Association of America

* "Numerous studies over the past 30 years have documented redlining by insurers--unfairly discriminating against low- and minority-income consumers because of where they live or other factors."

--Center for Economic Justice

* "There is little evidence to suggest that auto insurance is today, has been in the past or is likely in the future to be a driver of affordability issues among low- and moderate-income households."

--Insurance Information Institute

* "The cost of auto insurance is a barrier to car ownership for many families; in several states, auto insurance providers are allowed to base car insurance rates on factors such as income and neighborhood. In these instances, low-income families living in impoverished neighborhoods typically pay more for car insurance than wealthier residents with the same driving record."

--Marty Schwartz, president, Vehicles for Change

* "From a strict, objective economic perspective, affordability could be appropriately measured by determining whether or not consumers actually purchased insurance. Everyone at every income or wealth level wants to pay less for insurance. But if low-income consumers are purchasing insurance, then by definition it is affordable."

--Edward T. Collins, vice president and assistant general counsel, Allstate

* "It should be noted that low- and moderate-income drivers, according to CES [Consumer Expenditure Survey] 2012 data, spent more on auto insurance than on automobile maintenance, repairs, and finance charges combined."

--Signed by nine consumer advocacy groups, including the NAACP, National Council of La Raza and Vehicles for Change

What the Facts Say

Here are a few baseline realities:

* With the exception of New Hampshire, all states and the District of Columbia require consumers to maintain auto liability insurance as a condition of ownership.

* There are roughly 30 million uninsured motorists in the United States--a number that represents roughly one in eight drivers, according to a recent report by the Insurance Research Council. Insured drivers pay a portion of the costs incurred by drivers without insurance through uninsured motorist coverage.

* Car ownership is associated with a higher probability of employment and other factors associated with economic well-being. According to the recent federally funded Driving to Opportunity study, households with automobiles experience less exposure to poverty and are less likely to return to high-poverty neighborhoods than those without car access.

The insurance industry has been studying and reporting on issues involving auto insurance affordability for more than a decade before the FIO was founded.

In its response to the FIO's request for comment, the National Association of Insurance Commissioners cited more than a dozen industry studies on topics that included uninsured motorist issues, the competitiveness of auto markets, and insurer issues related to the availability and affordability of auto insurance.

In one 1993 "statistical data call," the NAIC Availability and Affordability Task Force collected personal lines data from the top 40 groups and ZIP codes in the major metropolitan areas of 23 states. The analysis found that consumers in low-income, high-minority urban neighborhoods paid more for car insurance and often purchased policies with less coverage than consumers from high-income, low-minority areas.

In analyzing that data, researchers said they were "unable to draw definitive conclusions about the cause of these market conditions and the data could not prove conclusively that unfair discrimination exists."

"In regard to the NAIC's finding that low-income consumers pay more than high-income consumers, the more recent government data we looked at seems to indicate that the situation has changed in the two decades since the NAIC did its analysis," said Robert Detlefsen, vice president of public policy at the National Association of Mutual Insurance Companies, which represents more than 1,400 property/casualty insurance company members.

In his response to the FIO, Detlefsen cited survey data from the Bureau of Labor Statistics' Consumer Expenditure Survey that compared by income level the amount spent on auto insurance versus other types of goods and services in 2012. According to the CES, consumers in the two lowest income percentiles spent less on auto insurance than they did on other essential services, such as food, housing and utilities, and more on total nonessentials than auto insurance.

"These data reveal that households in the two lowest quintiles spent nearly as much on alcohol and tobacco products combined as on automobile insurance, and that they spent more on audio and visual equipment and services than on automobile insurance. In addition, households in the lowest quintile spent nearly half as much on pets, toys and hobbies as they did on automobile insurance," NAMIC's letter stated.

"We were pleased to find that people in all income groups can afford to buy the product that brings them into compliance with the law and still have money left for some of life's amenities. It appears that competition among insurers has driven down prices to the point where low-income consumers can afford to purchase car insurance in addition to many of the same kinds of discretionary goods and services that more affluent people enjoy," Detlefsen said.

A Variety of Claims

A similar approach to determining auto insurance affordability for low-income people, this time contrasting the cost of auto insurance to income, was used in a 2013 study titled Auto Insurance Affordability, conducted by the Insurance Research Council. Among other findings, the report found that from the early 1990s to 2010, the ratio of average auto insurance expenditure to median income fell by more than 9% nationally, and that the average auto insurance expenditure to low-income ratio also fell 9%.

"We obtained income data from the census," said Patrick Schmid, the IRC's director of research. "I believe our measure, the ratio of average auto insurance expenditures to income, is a fairly appropriate quantitative measurement of auto insurance affordability."

Birny Birnbaum, executive director of the Center for Economic Justice and a former Texas state insurance regulator, said industry studies such as the IRC's seek to change the topic.

"What the industry studies do is basically change the question," Birnbaum said. "They change the question to what's happened to the average auto premium over time?' or what is the average burden of auto insurance to the average income?' Or they say things like 'auto insurance is affordable because on average it's a reasonable portion of consumer's income' or 'auto insurance is affordable because the uninsured motorist rate hasn't skyrocketed' or 'auto insurance is affordable because there's been a general decline over time in assigned risk pools.'

"If the question is 'what is the availability and affordability of insurance for low- and moderate-income consumers,'" he said, "the answer to that question has to involve what companies are offering insurance in those markets, at what prices, and how many of these consumers are able to afford that insurance at those prices."

The Consumer Federation of America, a Washington, D.C.-based association of nonprofit consumer organizations, was especially critical of the research approach taken by the IRC in its recent study.

"Perhaps the worst flaw is that the report does not study even one actual price paid by a low-income auto owner for state-required auto coverage. Had they done so, as CFA has done in six studies, they would see that often the lowest price for the coverage is over $1,000, more than 10% of the driver's income for the lowest-income quintile of American families," a CFA press release said.

"To understand auto insurance affordability, state insurance commissioners must study prices that insurers are currently actually charging to policyholders in selected low- and moderate-income ZIP codes," said J. Robert Hunter, CFA's director of insurance and a former Texas commissioner of insurance.

When Hunter and his CFA colleagues research the issue, a central part of their approach is to request rate quotes online from auto insurers and then compare low-income drivers' rates to the higher-income drivers' rates.

They used this approach earlier this year to help the New York Public Interest Research Group study auto rate practices in the state the NAIC ranked as having the fourth-highest auto rates in the nation. The group studied data from four of New York's top five insurance companies and found that three of them--Geico, Liberty Mutual and Progressive--quoted less-educated customers in lower-income jobs as much as 41% more than higher-educated customers in more professional jobs.

"The most striking example was with Geico, where you had one driver who worked in retail and had only a high school degree paying 41% more than a driver who had a college degree and worked as an executive, when all the other factors were the same" said NYPIRG's Campaign Director Andy Morrison. "That was the most striking example. How could this person, with the same driving background, same everything, pay 41% more solely on the basis of education and occupation?"

NAMIC's Detlefsen is critical of these types of studies.

"The way they get their quotes was just by entering information about a fictitious person on a website," he said. "One problem with this approach is that those quotes are often preliminary and subject to further analysis by the underwriting people in the company before offers of coverage at a certain price are actually made.

The Credit Score Debate

"One of the things that puzzled me about some of those studies was that they assigned their imaginary person a fictitious credit score, which they supposedly used in the course of obtaining the online quotes. But insurance companies don't use self-reported credit scores. Instead, they obtain the person's credit information from third-party vendors, and their websites usually disclose that fact. Obviously the vendor will not have credit information on a fictitious person. So it's not clear to me how you can create a fictitious person with a fictitious credit score for the purpose of obtaining an online quote."

Critics of auto insurance rating practices are especially critical of the use of credit scores as a means of helping to determine rates. From their perspective, the principal things that should be used to determine rates are driving-related factors, and not those unrelated to driving such as education, occupation and credit scores.

"In effect, these factors end up being proxies for income, race and ethnicity," NYPIRG's Morrison said. "The fact of the matter is that people on the bottom rungs of the economic ladder tend to have lower paying jobs and less education and this trend is more pronounced among black and Latino communities than among whites. What we found is that people with those jobs and without the college degree were paying significantly more with most of the insurance companies we looked at."

"This issue has been regularly studied by everyone from the Federal Trade Commission to state regulators and state legislators," countered Dave Snyder, director of personal lines policy of the Property Casualty Insurers Association of America.

"There have been hearings and special studies and they all pretty much conclude that although people don't like them, the fact of the matter is that they are accurate and non-discriminatory and they meet state law requirements," Snyder said. "Because they're more accurate, they've actually encouraged competition in the auto market because companies can have more confidence that they're able to pin the right rate to the right risk. They're able to write risks they might not have been able to write in the past because they weren't sure how to accurately access the risk."

The FTC study Snyder referenced, Credit-based Insurance Scores: Impacts on Consumers of Automobile Insurance, was completed in 2007 and in effect endorsed the practice, saying "their use is likely to make the price of insurance better match the risk of loss that consumers pose." While finding that credit-based scores did not prove to be a proxy for race and income, the study acknowledged that those groups did tend to have lower scores and that having these lower scores "likely lead to African-Americans and Hispanics paying relatively more for automobile insurance than non-Hispanic whites and Asians," according to an FTC press release that summarized the study's findings.

Despite these and other findings, the use of credit scoring remains controversial. According to a 2013 national NAIC survey, approximately half of respondents said their jurisdictions placed some limits on the use of credit scores in underwriting and rating. Seven states said that a person's credit history or score should not be the sole basis to cancel, deny or not renew an insurance policy. California, which is held by consumer advocates as the model for affordable auto insurance, prohibits the practice altogether.

When discussing the pricing of auto insurance, industry representatives said it was important to understand that the cost is predetermined to a certain extent by factors beyond insurers' control.

"Auto insurance premiums don't exist in a vacuum," said Bob Passmore, PCI senior director, personal lines policy. "They're very much driven by the cost environment. If you look at cost drivers like medical costs, highway safety and those types of issues, these are the things that drive the cost of insurance. If states are looking at ways to try to control auto insurance costs, those are the kinds of things they need to be considering."

"Insurers for decades have lived under standards that prohibit excessive, inadequate and unfairly discriminatory practices and this seems to be working pretty well in terms of allowing for innovation," Snyder added. "I guess the biggest concern we would have would be if that standard becomes politicized in a way that it ceases to be objective. There's a danger of misuse, but by and large the states have been responsible and the result has been a very competitive market that serves consumers well."

Both industry and advocates alike are awaiting the FIO's findings. The agency has not given a timeline for when its study will be released.

Key Points

* What's New: The Federal Insurance Office has asked for input as to whether traditionally underserved communities have access to affordable auto insurance.

* Why Now: Several consumer advocacy groups believe insurers charge more for auto insurance than people living in poverty can afford.

* What's Next: The FIO is in a fact-finding mode and has yet to announce what will happen after it collects all its data.
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Title Annotation:Regulatory/Law
Author:Lewis, Angelo John
Publication:Best's Review
Date:Oct 1, 2014
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