The Consumer Federation of America (“CFA”) is reporting that some major auto insurers charge higher rates to drivers who have less education or who are blue collar workers. The findings, contained in a new CFA report, found that for the minimum liability coverage required by state governments:
- GEICO often charges a factory worker with a high school degree far higher annual premiums than a plant supervisor with a college degree – 45 percent more in Seattle ($870 vs. $599), 40 percent more in Hartford ($1299 vs. $926), 33 percent more in Oakland ($922 vs. $693), 23 percent more in Louisville ($2200 vs. $1791), 21 percent more in Chicago ($1013 vs. $840), and 20 percent more in Baltimore ($1971 vs. $1647).
- At GEICO, these differences would be even greater if, for education, the comparisons also included no high school degree and a graduate degree. For example, the Baltimore factory worker would pay an annual premium of $2061 with no high school degree, an annual premium of $1971 with a high school degree, an annual premium of $1801 with a college degree, and an annual premium of $1722 with a graduate degree.
- Progressive also often charges a factory worker with a high school degree higher annual premiums than a plant supervisor with a college degree – 33 percent more in Baltimore ($1818 vs. $1362), 14 percent more in Houston ($1406 vs. $1236), nine percent more in Louisville ($2390 vs. $2185), nine percent more in Denver ($995 vs. $911), and eight percent more in Oakland ($736 vs. $684).
- Liberty Mutual charges a high school graduate higher annual premiums than a college graduate – 13 percent more in Baltimore ($2116 vs. $1877), 13 percent more in Houston ($1373 vs. $1216), 12 percent more in Phoenix ($1592 vs. $1418), and 10 percent more in Hartford ($1913 vs. $1735). In five other cities studied – Atlanta, Louisville, Chicago, Denver, and Seattle – Liberty's website quoted rates for a college graduate but not for a high school graduate.
- In many cities, Farmers charges those who are neither professionals nor certain government workers five percent higher premiums.
“Auto insurers charge high premiums for minimal coverage to most working people, even those with perfect driving records, who live in urban areas,” said Stephen Brobeck, CFA's executive director. “Since most Americans need a car and almost all states require the purchase of auto insurance, many lower income workers are faced with the choice of paying these high, and often unaffordable prices, or breaking the law by driving without insurance,” he added. CFA estimated that one-quarter to one-third of drivers with household incomes under $36,000 – 40 percent of all households – are uninsured.
“The American public knows that it is unfair for auto insurers to use factors like education and occupation in setting rates,” said J. Robert Hunter, CFA's Director of Insurance, a former Texas Insurance Commissioner, and a former Federal Insurance Administrator. “In effect, auto insurers are discriminating on the basis of income and race. States should prohibit the use of these demographic factors that bear no logical relation to insurer risk.”
The CFA analysis, conducted in May and June 2013, examined the use of education and occupation by the 10 largest auto insurers by market share – State Farm, Allstate, GEICO, Progressive, Farmers, USAA, Liberty Mutual, Nationwide, Travelers, and American Family – in 10 major urban areas in different parts of the country – Hartford, Baltimore, Atlanta, Louisville, Chicago, Houston, Denver, Phoenix, Oakland, and Seattle. CFA used the websites of these insurers to determine whether they used education and occupation in their pricing and, if so, the impact of the use of these factors. The driver studied was a 30-year old single woman renting in a moderate-income area (c. $30,000 median income), who was driving a 2003 Honda Civic, had driven for 10 years with no accidents or moving violations, and was without insurance coverage for the past 15 days.
The CFA found that if this woman were a factory worker with a high school degree, she would be charged high to very high annual premiums for minimum liability coverage by the eight insurers whose websites permitted rate comparisons (USAA and American Family did not) in five representative cities. In more than three-quarters of the 40 cases (78 percent), annual premiums exceeded $900 or were not quoted. And no premiums were lower than $500. By comparison, a special program for good, lower income drivers in California – not subsidized either by taxpayers or by other drivers – charged annual premiums of no more than $338, even to drivers in high-risk urban areas.
“The quoted prices, especially the nine exceeding $2000, show that insurers either are overcharging lower income consumers or are not interested in serving them,” said the CFA's Robert Hunter. “Since state governments require purchase of auto insurance, state insurance commissioners have an obligation to address this issue. And the relatively new Federal Insurance Office should make the study of this problem a priority,” he added.
According to the CFA, five of the 10 largest auto insurers – GEICO, Progressive, Liberty Mutual, Farmers, and American Family – apparently use education and occupation in their rate-making in most states.
The CFA reported that GEICO uses education and occupation in its rate-making across the country. In many states, it gives equal weight to each. For example, in Hartford a factory worker would pay 28 percent more than a factory superintendent ($1299 vs. $1018), but a factory worker would pay 28 percent more with a high school degree than with a college degree (again $1299 vs. $1018).
In Seattle, however, the GEICO website did not inquire about occupation but charged a factory worker with a high school degree 45 percent more than a factory worker with a college degree ($870 vs. $599). And in Atlanta the website did not inquire about either education or occupation.
According to the CFA, Progressive tends to give somewhat greater weight to education than to occupation. For example, in Louisville it charged a factory worker only one percent more than a plant superintendent ($2390 vs. $2357), but charged a factory worker with a high school degree seven percent more than the factory worker with a college degree ($2390 vs. $2228). Like GEICO, in Seattle the website did not inquire about occupation but charged progressively less as educational level increased – an annual premium of $1134 for no high school degree, $1042 for a high school degree, $964 for a college degree, and $946 for a graduate degree. And like GEICO, in Atlanta the website did not inquire about either education or occupation.
As indicated earlier, Liberty's quotes for a high school graduate were usually 10-13 percent higher than quotes for a college graduate, the CFA said. In one state, California, the insurer apparently also uses occupation as a rate-making factor. In Oakland, its quoted annual premium was $1074 for a factory workers and $892 for an executive.
According to the CFA, Farmers' quotes made distinctions between certain professionals and civil servants and “others.” In different cities, the “others” consistently were charged five percent higher rates.
According to the CFA, American Family was difficult to research because its website required information about an actual, rather than a hypothetical, driver. However, it did ask for specific information about occupation, though it is not clear how the insurer factored that information into its rate-making. State Farm, Allstate, USAA, Nationwide, and Travelers apparently do not use education or occupation in their rate-making, at least in the 10 states studied.
Allstate's website did not ask for specific information about occupation but did require one to indicate whether one was employed or unemployed in many states, and in some states, to identify certain occupations such as firefighter or policeman, though the CFA said that it was not clear how Allstate used any of this information in rate-making.
According to the CFA, only in California did Travelers' website ask for specific information about occupation, though the CFA said that it was not clear how the insurer used this information in rate-making in that state.
Responding to the CFA report, Alex Hageli, director of personal lines policy for the Property Casualty Insurers Association of America (“PCI”), said:
“Once again the CFA has released a study that it says shows insurers are pricing insurance based on something other than actuarially justified rating factors. This despite the fact that laws in all 50 states require insurers to charge actuarially appropriate rates. This despite the fact that state agencies charged with enforcing these laws in states such as Maryland and New Jersey have thoroughly reviewed insurers' use of rating factors such as education and occupation and found such use to be, without question, actuarially justified.
“We know that consumers want to be charged based on the level of risk that they represent rather than those rating factors some think are or are not appropriate for reasons having nothing to do with risk. We know that certain occupations are correlated with a lower level of risk and therefore, all other risks being equal, enjoy a lower rate. There are insurers that specialize in writing insurance to those in certain occupations, such as teachers (Horace Mann) and pharmacists (Pharmacists Mutual). It is doubtful these insurers would last long in a competitive marketplace by charging their target audience a higher rate than what other insurers charge.
“We continue to support, as we always have, the use of actuarially justified rating factors. Education and occupation are such factors. We have full confidence in state agencies to ferret out any inappropriate use of rating factors as alleged by CFA.”
Victoria Spears
Victoria Prussen Spears is senior vice president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. A graduate of Sarah Lawrence College and Brooklyn Law School, Ms. Spears was an attorney at a leading New York City law firm before joining Meyerowitz Communications. She may be contacted at [email protected].