a safe driver. Don’t buy a flashy sports car. Pay the
insurance premium on time.
are maxims many drivers follow to keep their auto
insurance costs in check. But they may not be enough for
many low-income drivers, who consumer advocates say are
routinely priced out of insurance coverage because they
are judged not just by their driving records, but by
their credit scores, occupation, education level or
a discriminatory practice by insurance companies that
disproportionately increases premium payments for
low-income drivers, said J. Robert Hunter, a former
Texas insurance commissioner and director of insurance
for the Consumer Federation of America. And some states
are trying to stop it.
states — California, Hawaii and Massachusetts —
prohibit insurers from using credit scores to determine
how much drivers should pay. And legislation was
introduced this year in almost a dozen others to prevent
insurance companies from using credit scores,
occupation, education level or other standards in
factoring how much they should charge for car insurance,
according to the National Conference of State
addition, California, Florida, Indiana, Maryland, Ohio
and, most recently, Pennsylvania, have ruled that
insurance companies cannot use "price
optimization" — evaluating consumer data or
competitors’ prices to determine whether a customer is
likely to shop around — to set prices for policies.
Heller, a California-based consultant to the CFA, said
low-income drivers often are less likely to shop around
for competitive rates partly because of lower financial
literacy. Insurance companies spot that, he said, and
will raise premiums on those drivers because they think
they’ll stick with them rather than go to a
insurance companies charge the most to the people who
can afford it the least. That’s because auto insurance
companies place such a large emphasis on their customers’
occupation, level of education, credit history and other
factors related to wealth, rather than driving
safety," Heller said.
advocates for insurers say they use legitimate tools to
set prices based on their financial risk. Price
optimization has actually lowered insurance rates and is
likely to create long-term price stabilization, said
Robert Hartwig, president and economist at the Insurance
Information Institute, a nonprofit communications group
supported by the insurance industry. And, he said, auto
insurance rates are declining for all drivers, including
moderate- and low-income motorists.
studying market factors, including competitor prices,
rate-setting judgments become less subjective, Hartwig
said, which could ultimately lead insurance companies to
offer more discounts for longevity with a company.
organization also opposes attempts by states to
eliminate credit scores and other factors from rate
setting, saying those evaluation techniques have proven
to be legitimate measures of the financial risks
associated with a driver.
states, except New Hampshire, require drivers to buy at
least a minimum amount of auto insurance in the event
they cause property damage or injuries. For some
low-income drivers facing high insurance rates, that
presents a choice between driving illegally or not
driving at all.
companies say they use a multitude of factors to
determine how much each customer should pay. The factors
can range from driving record and type of car to marital
status, credit score, occupation, education and where
the driver lives.
advocates say these rating tools hurt low-income drivers
because they are more likely to receive negative marks
for being single, having poor credit, having limited
education, or living in a neighborhood where there is
significant risk of vehicle vandalism or theft.
like a utility in that everybody needs it," Heller
said. "But it’s not like a utility in that
pricing is wildly different from one consumer to the
Hartwig said the factors insurers use to set prices can
be mathematically correlated to the risks associated
with insuring a driver.
insurers use education, not all." Hartwig said.
"They do that because they have found that the
level of education is associated with losses. There’s
no factor that any insurer uses that doesn’t have to
do with loss."
recent Consumer Reports study of 2 billion insurance
quotes at 700 companies found that insurers are less
likely to assess motorists based on their driving
habits, and more likely to do so based on their
study found that in most states in which credit scores
can be used to determine premiums, drivers who had been
convicted of driving under the influence, but had
excellent credit scores, still paid lower premiums than
drivers who had good driving records, but poor credit
only are there pricing issues, but there are some
fundamental fairness issues in the way that pricing
results for good drivers," said Norma Garcia, a
senior attorney with Consumers Union, the policy and
action division of Consumer Reports. "If you’ve
had a drunk-driving conviction, chances are you’re a
worse driver than someone out there who has a (low)
said that to improve fairness in rate setting, states
should eliminate the socioeconomic factors and emphasize
driver safety, strengthen oversight of prices charged by
insurance companies and create low-cost insurance
programs for qualifying drivers.
setting prices solely based on a driver’s record can
pose problems because records of crashes or moving
violations are often missing from state databases,
consumer advocates contend that the cost of auto
insurance is out of reach for many poor people,
insurance industry studies show that the cost of
insurance is actually coming down, even for consumers in
the lowest income brackets.
attributes the decline in pricing to increased
competition among insurance companies. He said policy
options are available to most drivers regardless of risk
associated with a vehicle or driving history, and
coverage options are "generally affordable."
big part of the reason is it’s a very competitive
market and never before have there been more insurers
competing for your business," Hartwig said.
"And never before have you been able to generate so
many quotes so quickly from so many insurers."
new study from the Insurance Research Council points to
data indicating auto insurance is becoming more
affordable for drivers at all income levels, decreasing
from 2 percent to less than 1.5 percent of an average
consumer’s earnings since the 1990s. However, people
with the lowest incomes are still spending more than 3.5
percent of their income on auto insurance. That number
is down from more than 4 percent in the 1990s.
the country’s highest earners, the share of income
spent on insurance decreased from 2 percent to less than
1 percent in that time.
can say on average premiums have come down," Heller
said of studies that point to lower prices. "But
that doesn’t mean affordability has increased. They’ve
come down on average, but industry practices have come
down hard on poor people."
states have not issued many strict rate-setting reforms,
California has the oldest and most comprehensive rating
structure, advocates say.
in 1988 as a voter referendum, California’s
Proposition 103 requires that insurance providers in the
state prioritize three main factors — years of
experience, driving record and number of miles driven
each year — before they consider 16 other optional
factors such as marital status, age, frequency of
insurance claims or address. The optional factors cannot
have more influence than the three mandatory elements in
determining a driver’s rate quote.
California) you need to provide the documentation and
convince state experts that you’re not ripping your
customers off," Heller said. "Where, in most
states, we’re not going to take a second look."
has also established a low-cost insurance program for
2013 report by the CFA found that the California reforms
had saved state drivers more than $100 billion over 25
years and that they were spending .3 percent less on
insurance in 2010 than they had in 1989, while the
country was spending 43.3 percent more.
interesting because a lot of things the auto insurance
industry are claiming are impossible or unrealistic are
already happening," Garcia said. "They’re
doing just fine in California."