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SPECIAL REPORT: CFA’s Latest Auto Insurance Report Requires A Closer Look

    A good driving record doesn’t necessarily mean low car insurance rates. In fact, the largest personal auto carriers frequently make safe drivers pay more than those who cause an accident.
 
    That’s what the Consumer Federation of America is saying in its latest report – issued in the form of a Jan. 28 press release – about automobile insurance pricing.
 
    It also says that a noncompetitive personal auto insurance market is a main reason for high premiums, particularly those paid by low- and moderate-income producers.
 
    Let’s take a closer look.
 
   
CFA: ‘Basic Auto Insurance Is Excessive, Unaffordable’
    CFA priced policies in twelve cities using the websites of the five largest personal auto insurers – State Farm, Allstate, GEICO, Farmers, and Progressive. Together, they have more than half of the personal auto insurance market, by CFA’s calculations.
 
    It compared premiums for that were quoted for two 30-year-old women with similar characteristics:
    • each has been driving for 10 years;
    • both live on the same street in the same middle-income ZIP code with a median income of $50,000 a year;
    • both drive the same car, a 2002 Honda Civic;
    • both drive 7,500 miles each year; and
    • both sought minimum liability coverage required by the state of the city in question.
 
    But the two women differed in a number of respects:
    • Buyer A is single, Buyer B is married;
    • Buyer A has a high school diploma, Buyer B has a master’s degree;
    • Buyer A is a receptionist, Buyer B is an executive;
    • Buyer A is a renter, Buyer B is a homeowner;
    • Buyer A has a 45-day break in auto insurance coverage, Buyer B has had continuous coverage; and
    • Buyer A has no accidents or moving violations, Buyer B has one at-fault accident with $800 of damage within the past three years.
 
    CFA refers to Buyer A as “the safe driver” with a low- to moderate-income, and to Buyer B as typical of “drivers causing an accident.”
 
    CFA then obtained 120 insurance quotes – one for each woman from the five insurers in a dozen cities (Atlanta, Baltimore, Chicago, Cleveland, Denver, the District of Columbia, Houston, Los Angeles, Phoenix, Seattle, St. Louis and Tampa) – and performed 60 comparisons of those rates.
 
    In two-thirds of the 60 comparisons, the insurers quoted higher premiums to the “safe driver” than to Driver B, CFA said in its press release. That was particularly true when it came to Farmers, GEICO, and Progressive – in every case, according to CFA, those insurers quoted the “safe driver” a higher premium than the driver with an accident on her record, and that, in several cases, some companies refused a quote to Driver A – the “safe driver” – but gave one to Driver B.
 
    On the other hand, CFA said State Farm charged the “safe driver” less in all 12 cities, and its rates were always either the lowest or second-lowest.
 
    On a broader note – and this, perhaps, is what the CFA was really getting at – automobile insurance, even at the bare-bones level, is so expensive it is beyond the reach of many low- and moderate-income consumers.
 
    In more than three-fifths of the comparisons with those higher premiums, the rate quoted the “safe driver” exceeded the premium quoted Drive B by at least 25 percent. In 35 of the 60 cases studied, the insurers either quoted annual premiums in excess of $1,000 or refused to quote a price. And, in only four cases did they quote an annual premium under $500.
 
    That’s “excessive and unaffordable,” in CFA’s view.
 
    Said CFA executive director Stephen Brobeck: “Unfortunately, the discriminatory practices of auto insurers mainly harm low- and moderate-income drivers. This damage can be considerable since all states but one require drivers to carry auto insurance, and most Americans need a car to pursue work opportunities.”
 
    “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,” Hunter added.
 
   
A Little More Than A Matter of Semantics
    People have been examining various elements of the CFA report since its Monday release.
 
    One industry observer suggested looking at several definitions CFA uses in its press release. “Start with safe driver,” he said. “Their example of a safe driver is someone without an accident but who has, presumably, been driving without insurance for 45 days.
 
    “OK, to be fair, CFA says the receptionist has simply ‘had a lapse in coverage.’ But really, considering Hunter’s comment that ‘so many risk breaking the law and getting stuck with accident bills’ ... well, come on, she’s been driving without insurance. Right? And how safe is that?”
 
    Indeed, Bob Detlefsen, vice president of public affairs for the National Association of Mutual Insurance Companies, told Insurance Compliance Insight that such a lapse could raise someone’s premiums significantly and “may be what accounts for a large amount of the quote.”
 
    Others commenting online agreed.
 
    Typical was this online comment from someone identifying herself as “Crystal Sandy” who called CFA’s report “a flawed study.”
 
    “Continuous vs. non-continuous coverage is a huge rating factor,” she indicated. “What type of vehicle you drive is relevant to rating even if you carry only minimum liability because of loss history (actuarial results) of the vehicle types. Married people often get lower rates than unmarried people (again this is based on loss statistics). Income is an inaccurate way to phrase it, it is a lot more likely that financial stability (in other words credit history), which isn't based on income at all, was used.
 
    “Education,” she thought, “is not a factor with most carriers and when it is, it isn’t a large one. Point is that the driving record is one piece of how you get rated because a *lot* of factors come into statistical relevance when determining what kind of risk pool you fall into.”
 
    “anonymousjohnson,” a self-proclaimed “Insurance Industry Guy” who said he helps to set rates, said this about lapses in coverage. The comments came in reader comments to an article about the report:
    Coverage lapses are highly correlated with increased loss cost. Conversely, continuous coverage is linked to decreased cost.
    Why? Who knows. My personal hypothesis is that people often drop coverage in a financial bind, and keep driving even without it. That's a ballsy (risk-prone) thing to do. Risk prone drivers = costly drivers.
    But enough with my unscientific guessing games. The data is what matters here. And the data says: People with lapses cost more overall.
 
    As far as the other end of the spectrum, CFA’s model for unsafe drivers – “those responsible for accidents” – is someone who had a single accident causing just $800 in damage. That’s not much damage by today’s standards, one claims adjuster told ICI, and much of that could be covered by a deductible.
 
    Depending on the company – Allstate, for example, offers accident forgiveness – one minor accident in three years could be ignored entirely and not even factored into a premium.
 
    Then there is the issue of the competition – or lack of it in CFA’s view – in the personal auto market.
 
    Stephen Brobeck would have you believe that the personal auto insurance market is “highly uncompetitive” because, “Any economist will tell you that when prices range 100 percent, even 200 percent, for similar products, that marketplace is not competitive.”
 
    That may or may not be the case. We’ll admit we dozed off from time to time in Economics 101.
 
    We do remember, however, that the textbook definition of a competitive market is a market situation in which there exists a homogeneous product, freedom to enter or exit from the market, and a large number of buyers and sellers, none of whom individually can affect price.
 
    Put another way, competition is a rivalry in which every seller tries to get what other sellers are seeking – sales, profit, and market share – at the same time by offering the best practicable combination of price, quality, and service.
 
    From another source: A market with a large number of buyers and a large number of sellers, such that no single buyer or seller is able to influence the price or any other aspect of the market – that is, no one controls the market.
 
    Any way you slice it, that could describe the personal auto insurance market in many states.
 
    Like the one, for instance, in Massachusetts where, according to a Boston Globe article this week, “Competition in the state’s car insurance market has yielded an unexpected benefit: Thousands of residents who once had to buy expensive home coverage from the Massachusetts FAIR Plan are increasingly able to find policies through other insurers, saving them hundreds of dollars a year on premiums.”
 
    The article notes that, since 2008 when the state gave insurers more freedom to set their own auto insurance rates, 13 more auto insurance companies have set up shop in Massachusetts, with most also selling homeowners policies or partnering with firms that do.
 
    “It is all driven by this shift in the competitive marketplace,” said Robert Tommasino, general counsel for the Massachusetts Property Insurance Underwriting Association, better known as the FAIR Plan.
 
    There’s that word again: competition.
 
    The Insurance Information Institute says there is plenty of it in personal auto insurance, and that “highly competitive auto insurance marketplaces” are the key to making coverage available and affordable for all drivers.
 
 “Auto insurance provides important, cost-effective financial protection to millions of Americans, and most drivers have dozens of auto insurers constantly competing for their business,” said Dr. Steven Weisbart, a III senior vice president and its chief economist. “The price is risk-based, and always will be,” he said.
 
    “Competitive marketplaces drive down prices,” Weisbart continued. In fact, typical annual auto insurance expenditures dropped to $791 in 2010, more than 3 percent less than the $818 [consumers paid] in 2006, according to the NAIC’s 2009/2010 Auto Insurance Database Report (the most recent such figures that are available).
 
    And, he added, just to drive the point home, “Anyone who watches television commercials knows auto insurance coverage is widely available in every state. Drivers should shop around if they think their current auto insurer is not meeting their needs or is charging too high a price.”
 
    Chris Hackett, director of personal lines policy for the Property Casualty Insurers Association of America, also offered the TV commercials argument. “Watch for just a couple of hours and you’ll see a number of commercials of auto insurance that want your business.”
 
   
Hunter & The Industry Debate CFA’s Assertions
    Bob Hunter and the industry don’t often go toe-to-toe when it comes to discussing insurance. And they didn’t, directly, in this case, either.
 
    So step into the ring for the verbal fencing based on what parties on both sides told Insurance Compliance Insight.
 
    When Weisbart of I.I.I., for example, said typical annual auto insurance expenditures dropped 3 percent in four years, Hunter countered with this parry:
   The I.I.I. is like the actuary who drowned in a river that averaged 2 inches in depth. The overall small drop in premiums for everyone does not tell the story of the plight of low- and moderate-income Americans. For example, the prices might be dropping as richer Americans get a break on price at the expense of the poor. The average premium might also be dropping because lower-income drivers are now 25 percent to 33 percent uninsured. Dropping higher priced insurance and driving uninsured would lower the averages.
    I.I.I. does not respond to our basic question: Can the low- and moderate-income populations of America afford the required auto insurance? They can quibble about our methods but we are finding real and unaffordable prices.
 
    Detlefsen, meanwhile, took CFA to task for limiting its inquiry to just five companies, aiming most of its criticism at four of them, and ignoring the fact that dozens of insurers compete in the 12 cities it focused on. “Surveying independent agents would yield results far more reliable and meaningful than the crudely tendentious method employed by CFA,” he said.
 
    Indeed, when Insurance Compliance Insight asked Hunter during the press conference why more carriers weren’t included, he said it was because the work on the report had been “labor intensive.”
 
    That response, said Detlefsen, suggested that CFA is incapable of doing a proper study, and that Hunter’s response “underscores CFA’s lack of credibility.”
 
    Hunter’s reply:
    NAMIC is accusing CFA of poor research? They can check the numbers easily if they wanted to. All they have to do is go online and do it. The insurers are in a glass house here. We get nothing when we ask for the credit score and other rate class models, data and methods. Actually doing the work instead of asking us to do it requires effort. NAMIC refuses to do its homework.
 
    The consumer group also made a big point about discriminatory practices of auto insurers [that] mainly harm low- and moderate-income drivers. It was a repeat accusation CFA also made last year when another report said consumers objected to insurance companies using factors like education, occupation, lack of previous insurance and other non-driving factors to set automobile rates (ICI, Sept. 24, 2012). The group said then that those factors discriminate against lower-income drivers, causing them to pay higher rates – as much as double those of other drivers.
 
    Detlefsen was having none of it. “CFA suggests that what it calls ‘non-driving-related’ rating factors are not predictive of risk ... [and] simply assumes that the only relevant risk factors are those involving accident history,” he said. “CFA’s entire critique is based on this one false assumption.”
 
    And, as the American Insurance Association pointed out, insurers use a wide variety of proven factors to assess risk and determine policyholder rates which are approved by state insurance regulators.
 
    “The use of these factors – such as credit-based insurance scoring, location of the vehicle, driver experience, traffic citations, continuity of coverage and education – helps insurers to more accurately price risk. Generally speaking, the more consumers know about these tools, the more receptive they are to them given their broad overall benefit,” said Will Rijksen, AIA’s vice president of public affairs.
 
    Hunter’s reply:
    No one has ever been able to show that there is a thesis underlying education and occupation rating that was tested by some hidden correlation. All they claim is a correlation, which is insufficient to make the case. A thesis is necessary as well. Use of these factors is actuarially unsound since they bear no reasonable relationship to risk. Policymakers should ask why auto insurers are permitted to discriminate on the basis of non-driving-related factors such as occupation or education. [And] state insurance regulators should require auto insurers to explain why they believe factors such as education and income are better predictors of losses than are at-fault accidents.
 
   
The Solution to Paying Too Much for Auto Insurance
    Just for argument’s sake, let’s say that the CFA is correct, and that some insurers are charging far too much for automobile insurance.
 
    There’s an easy solution ... one that just about everyone in the industry would suggest.
 
    Comparison shop.
 
    “Competitive marketplaces drive down prices,” said Weisbart of the I.I.I. “Drivers should shop around if they think their current auto insurer is not meeting their needs, or is charging too high a price.”
 
    Adds AIA’s Rijksen: “Auto insurance remains a very competitive market and consumers are well-advised to shop around to find the coverage that best meets their individual needs.”
 
    We’d cite others. But you get the idea.
 
    As the CFA’s own research shows, there simply isn’t any reason to pay one company $3,292 for auto insurance in Baltimore (or $2,046 in Chicago), when other carriers will cover the same driver for $822 (or $392).
 
    After all, that’s what competition is all about.
 
   
Copyright 2013 ProBusiness Publishing LLC All Rights Reserved
Jan. 31, 2013
 
Insurance Compliance Insight is a general circulation weekly publication focused on insurance compliance and regulatory issues. Nothing within it should be interpreted as offering investment advice, legal counsel or other professional services. This article, while copyrighted, can be freely shared. 
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