CFA: 4 of Top 5 Auto Insurers Over-emphasizing 'Discriminatory' Rating Factors

A new study by the Consumer Federation of America lauds State Farm “as a company that is successful” in the highly competitive personal-auto market without the need to use “highly discriminatory factors” in setting rates.

The study, released today, found that four out of five insurers in 12 competitive markets, by placing too much emphasis on other rating factors, frequently charge higher premiums to safe drivers than to those who recently caused an accident (seen in two-thirds of the 60 cases studied).

In more than three-fifths of the cases with these higher premiums, the premium quoted the safe driver exceeded the premium quoted the unsafe driver by at least 25 percent, the study found.

In conducting the study, CFA priced policies in 12 cities using the websites of the five largest auto insurers: State Farm, Allstate, GEICO, Farmers and Progressive. CFA said that these insurers control more than half the private auto-insurance market. 

The higher prices for “good drivers” mainly reflect insurer use of rating factors such as education and occupation that, in a 2012 nationwide survey, more than two-thirds of Americans said were unfair.

The study found that there were significant differences among the five major insurers. 

On the one hand, in Farmers, GEICO, and Progressive quoted the safe driver a higher premium than the driver causing an accident in ever case. The report said that in several cases, companies refused a quote to the good driver but gave one to the accident-causer.

On the other hand, in all 12 cities, State Farm charged the good driver less.  Moreover, in all 12 cities, the rates quoted by State Farm were either the lowest (six cities) or the second-lowest (six cities), the study found.

“With nearly one-quarter of the private passenger auto insurance business, State Farm dominates the market,” said Robert Hunter, director of insurance for the CFA.

“If they can be a successful company without using highly discriminatory factors, other large companies should be able to do so as well,” he said.

Hunter said that state-insurance regulators should require auto insurers to explain why they believe factors such as education and income are better predictors of losses than at-fault accidents.

 “Policymakers should ask why auto insurers are permitted to discriminate on the basis of non-driving-related factors such as occupation or education,” he added. 

Hunter said the study found that, in 35 of the 60 cases studied, the insurers either quoted annual premiums in excess of $1,000 or refused to quote a price. In only four cases did they quote an annual premium under $500.

He said a fairly high percentage of low- and moderate-income drivers cannot afford to purchase auto insurance, which is why so many risk breaking the law and getting stuck with accident bills.

“State regulators should ask insurers why they cannot offer more safe drivers basic minimum liability coverage for about $300, and never more than $500, annually,” Hunter said.

 “In California's state-run, low-income auto-insurance program for good drivers, even most participating drivers from Los Angeles are provided this coverage for under $400 annually,” he added. 

INDUSTRY REACTS

But industry representatives cited flaws in the CFA's approach to its report. Steve Weisbart, chief economist of the Insurance Information Institute, said the premium auto-insurance policyholders pay is determined in part by their driving record, the type of car they drive, and the miles they drive each year. He said that these rate-setting variables were downplayed in the CFA analysis. Weisbert also said that the National Association of Insurance Commissioners (NAIC) has found that the typical U.S. motorist had seen his or her annual auto insurance expenditures drop to $791.22 in 2010, 3 percent less than they were paying in 2006 ($817.99).

At the same time, Robert Detlefsen, vice president of public policy at the National Association of Mutual Insurance Companies, charged that the CFA statement “is not a report, it's a press release.”

Detlefsen said that a report that describes research findings should contain, at minimum, a detailed description of the research methodology that was used, including an acknowledgement of any limitations that could influence the findings. “CFA suggests that what it calls 'non-driving-related' rating factors are not predictive of risk; however, the only evidence it offers for this assertion is a public-opinion survey. CFA simply assumes that the only relevant risk factors are those involving accident history. CFA's entire critique is based on this one false assumption.”

Detlefsen added, “As in its previous 'reports,' CFA limits its inquiry to just five companies, aiming most of its criticism at four of them, ignoring the fact that dozens of insurers compete in the 12 cities it focused on.

“A simple way to determine the amount of premium that drivers with different risk factors pay for auto liability insurance would be to survey independent agents in particular cities and zip-code areas. Such an approach would yield results far more reliable and meaningful than the crudely tendentious method employed by CFA.”

Weisbart noted that state-insurance regulators already review and approve the various rating criteria (e.g., a driver's age, gender and, in some instances, credit-based insurance scores and education and occupation) auto insurers are allowed to employ when pricing a prospective or current policyholder's policy.  He also noted that mandatory minimum liability coverages a driver must purchase vary from state to state.

 “As anyone who watches television commercials knows, auto insurance coverage is widely available in every U.S. state,” Weisbart said. “And competitive marketplaces drive down prices. Drivers should shop around if they feel as though their current auto insurer is not meeting their needs, or charging too high a price.”

Jeff Sibel, a spokesman for Progressive, based in Mayfield Village, Ohio, said Progressive works to price each driver's policy as accurately as possible so that every driver pays the appropriate amount based on his or her risk of having an accident.  “We use multiple rating factors, which sometimes include non-driving factors that have been proven to be predictive of a person's likelihood of being involved in a crash,” he said.

Sible also said that there are ways for consumers to take their insurance rates into their own hands by utilizing tools like usage-based insurance. “For example, our usage based insurance program, Snapshot, is a voluntary program available in 43 states and Washington D.C.,” he said.

Sible added, “In our Snapshot program we've found that actual driving behavior is the leading variable in predicting a driver's risk. Behaviors that Snapshot measures includes the time of day you're driving, the amount of miles you drive and how many hard brakes you make.”

State Farm, Allstate and Farmers did not return requests for comment.

Updated with comments from Progressive.