Insurers use zip codes and highest education attained to compute insurance rates for drivers which according to one report means low-income drivers pay more for car insurance.
A report released earlier this year by the Consumer Federation of America blames car insurance companies for penalizing drivers with a lower income.
It is illegal for insurers to ask drivers how much they make but that doesn’t prevent them from using other factors such as zip codes and education attained to gather similar information-thereby charging lower income families higher insurance premiums based on legal factors.
The auto insurance industry responded swiftly to accusations from the CFA report, stating that anyone who has access to media knows there are plenty of insurance options available. Drivers in the U.S. have the information they need to shop for “better” rates if they feel their current insurer is overcharging them.
The Adage- You are What You Eat, Applies
The advantage and disadvantage of living in a technologically gilded age gives companies the ability to pin-point and analyze data to determine and predict consumer behavior. Amazon.Com uses data to give you “suggestions” on other music you might like while car insurance companies can take the same information and group you with other “like” drivers. If drivers like you who live in the same area, share a similar occupation, credit history and dozens of other shared criteria as you file an insurance claim- your insurance rate offering goes up. Whereas if you live in a more preferred part of town or have similar behavioral traits as others who don’t file a claim, you might be paying less than someone else.
Comparing Apples to Apples
The comprehensive CFA report presents the example of a single man with a clean driving record around 30 years-old who drives a Ford Taurus 20 miles each way, to work as a case study. The male, mantled with an MBA and a place in an affluent St. Louis suburb was given a $558 a year premium. When the CFA modified the behaviors and traits of the same male, here is what they found:
- Anything less than an MBA= $71 insurance rate increase
- Lost his job and is unemployed= $84 increase
- Moved to a less affluent part of town= $347 increase
- Allowed his coverage to gap= $638 increase
- Now makes installment payments rather than the lump sum= $60 increase
The interesting thing is, none of these behaviors denotes that the same man with an MBA who lives in a “better” part of town is a “better” driver.
Follow the Money
Insurance companies set their rates based on how much each driver’s individual factors raise the risk of a potential claim. Companies must- by law apply the same rating formula they use for one driver on all drivers. For instance, insurers can’t raise the insurance rate for a speeding ticket on one driver and not on another because the latter live in a different zip code. Insurance companies get around these laws by charging more for factors shared by lower-income drivers. The CFA report discovered that insurers overcharged drivers with minimum coverage by thousands of dollars. In states where credit history is included in the rating factor, drivers with low credit histories could pay as much as 25% more for insurance than other drivers.
What Insurer’s Say
Insurance companies state that there are strong correlations between high risk drivers and their occupation and credit history. The trouble with this argument is that this makes the good drivers pay rates they don’t deserve and might not be able to afford along with their bad driver counterparts.
Based on the CFA report, would it seem a stretch to say that insurers are seemingly more motivated to sell car insurance to higher income families than lower income families?