Several large U.S. auto insurance companies use education levels and occupation to set rates, effectively pricing some low- and moderate-income earners out of the market, according to a report by the Consumer Federation of America.
The report, released on Monday, looked at premiums set by the 10 largest auto insurance companies in 10 urban areas across the United States.
The CFA plugged information about a fictional person into each company’s website to get a quote, changing only education level and occupation to see the effect on rates. Five of the insurance companies were found to collect such information.
In some cases, premiums for minimum-liability coverage exceeded Dollars2000 and in one instance, in Baltimore, it was more than Dollars4000, from Travelers Insurance.
“The quoted prices, especially the nine exceeding Dollars2000, show that insurers either are overcharging lower-income consumers or are not interested in serving them,” Bob Hunter, the CFA’s director of insurance, said in a statement.
The report found that Geico, part of the Berkshire Hathaway group of companies, charges more in six of the analyzed markets for a factory worker with a high school diploma than for a factory supervisor with a college degree. The rate could be as much as 45 percent more in Seattle or as low as 20 percent more in Baltimore.
Progressive Corp., which had the second-highest difference in premiums, was found to charge the factory worker 33 percent more in Baltimore and 8 percent more in Oakland, California.
Since education and occupation have been found to correlate with race, the CFA said the practice of using such factors is discriminatory.
However, Robert Hartwig, an economist and president of the Insurance Information Institute, an industry group representing insurance companies, said dozens of factors go into determining insurance rates, each correlating with risk.
“Why would an insurer collect data that is not useful?” Hartwig asked. “These factors are used for one reason and one reason only, and that’s to ascertain risk.”
Common practices that the CFA agreed should be used for setting rates include a person’s past driving record and miles driven. Location and type of car are also often used because they can increase the cost of a claim.
Factors such as age, gender and credit ratings are also used because they have been found to correlate with the frequency or size of claims, according to the III’s website.
But the CFA said that while such factors may indicate correlation, they do not necessarily indicate causation.
Hartwig defended the use of correlation, saying it was what insurers and actuaries typically use because causation might never be known.
Hartwig also said the use of so many different models was a sign of a competitive market. A market in which all companies used the same variables would result in uniform pricing, he said.
Using a survey conducted by market research firm ORC International, the CFA said about two-thirds of Americans think the use of education and occupation to set insurance rates is unfair.
The organization said the Federal Insurance Office, an agency born out of the 2010 Dodd-Frank financial regulatory reform law, might be able to change how insurers determine rates.
Insurance regulation is usually at the state level. But Stephen Brobeck, executive director at the CFA, suggested it is not a big enough concern for state officials and said he hoped attention from consumer advocacy groups would change that.
“Many of the insurance commissioners and the departments are not sensitive enough to the needs of the insured, particularly for low- and moderate-income drivers in their states,” Brobeck said on a conference call.
He added that the CFA also opposes the use of credit ratings because it discriminates against low-income earners.
Auto insurance is required to own and operate a vehicle in all U.S. states except New Hampshire.