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Insurer Practices Under Scrutiny for Overcharging the Poor

Auto insurance is a strange thing. We understand its necessity, but it's essentially a privately-offered utility that the state requires us to buy. Now, we understand why—uninsured drivers cost people (and the courts) a great deal of money. When uninsured motorists get into accidents, finding a remedy for the injured is more difficult.

To be clear, we're not against auto insurance; far from it, we believe that having insurance is a vital component of safe roads and a fair legal system. When people's driving is backed by an insurance company, injured people are able to get restitution for medical expenses, loss of wages, and lost earning capacity. That's a good thing.

But it's strange because insurance companies are using the law to force low-income drivers into buying exorbitant coverage plans...and no one is doing anything about it.

Price Optimization Prices Drivers Out of the Insurance Market

Low-income drivers are spending around 3.5 percent of their income on auto insurance, nearly twice as much as the average driver. Part of the problem is that people with smaller incomes are less "financially literate"—as in, they're less likely to know what a fair price is for insurance.

As a result, an insurance practice called "price optimization" unfairly raises prices for low-income drivers—the people most in need of affordable auto insurance. Price optimization allows insurers to use consumer data to determine if someone is likely to shop around, then raising or lowering the price depending on that likelihood.

The practice is now illegal in California, Florida, Indiana, Maryland, Ohio, and Pennsylvania because it allows the insurance industry to make getting insurance harder for the people who most need to save their money. It essentially taxes consumers based on their likelihood to choose the first insurer they talk to.

DUI? No Problem. Bad Credit? Big Problem.

Another major obstacle for poor drivers?

Insurance companies may not actually care if you're a good driver—as long as you have good credit. One Consumer Reports analysis of 2 billion insurance quotes from 700 companies found that insurance companies are far more likely to assess drivers based on socioeconomic status (income, occupation, credit score) rather than their driving history.

In all states except California, Hawaii, and Massachusetts, it's still legal to price coverage using a person's credit score. In these same states, it was discovered that drivers who had DUIs on their record still paid lower premiums than good drivers with bad credit.

Doug Heller, a consumer advocate from California, said "It's like a utility in that everybody needs it. But it's not like a utility in that pricing is wildly different from one consumer to the next."

If car insurance is required by law (as is the case in 49 of 50 states), then how it's priced needs to be more carefully regulated...and California may have found the solution 30 years ago.

California Reformed Insurance 30 Years Ago

In 1988, California residents passed Proposition 103—an insurance reform referendum. Prop 103 forced insurers to consider 3 main factors when pricing coverage before consider 16 optional, less-weighted factors. The 3 factors must be weighted more than the 16 other options.

The three options are simple:

  • Years of experience
  • Driving record
  • Miles driven each year

California also created a low-cost insurance program for low-income drivers.

But Are the Reforms Working?

Obviously, an arrangement like this is costing taxpayers money. You can't force insurance companies to abide by rules that don't allow them to use consumer data points like marital status, zip code, or education level. After all, insurer advocates claim that the perfectly legitimate means by which they price quotes allow them to offer lower prices on average.

Except California's reforms aren't costing them anything—the state is saving money.

To be exact, California drivers have saved $100 billion dollars on insurance from 1988 to 2013, and pay .3 percent less on insurance now than they did in 1989. If that seems fairly negligible, consider this: the rest of the country's drivers are spending 43.3 percent more on insurance today than they did in 1989.

We can make our roads safer and save our residents an enormous amount of money through the application of simple, sensible rules: insurers should look at how drivers drive in order to price their coverage. That's it.

Let's hope the idea catches on with insurance companies.