Car Insurance Community Rejects Consumer Group’s Conclusions

A new report released this week by the Consumer Federation of America (CFA) says that premiums have become an undue economic burden on low- and moderate-income (LMI) Americans and that state regulators should do all they can to reduce costs for this group.

“What is undeniable is that high auto insurance costs for LMI households either impose a substantial financial burden or greatly limit economic opportunity, especially access to jobs,” said the report’s authors, who are a former Texas regulator and the executive director of insurance at the CFA.

The CFA report makes three major recommendations to help right the situation: move to slice state-mandated minimum liability limits, create special programs for low-income Americans to get cheaper coverage and eliminate elements of the pricing process that hurt LMI households.

But members of the auto insurance community have been lashing out in response to the report, saying that placing more regulation on insurers would decrease competition in the marketplace, which could in turn actually end driving costs up for consumers.

“The most effective way to lower the price of auto insurance is reduce the costs of underlying factors” like the cost of health care and abuse of the system, said Robert Hartwig, president of the Insurance Information Institute (III). “Changing rating factors that have been shown to accurately project future losses will only distort prices and result in good drivers subsidizing riskier ones.”

The Property Casualty Insurers Association of America (PCI) responded in an official statement with equal tenacity.

“The CFA has the flawed impression that overregulation will keep insurance rates down,” said Paul Blume, the senior vice president of state government relations for the PCI. “Ultimately, overly restrictive laws and regulations have been shown time and again to reduce consumer choice and inhibit market innovations.”

Reducing State Liability Minimums

Support of efforts to cut state liability minimums–the minimum amount of coverage that policies issued in a particular state must provide–is about the only thing that the CFA and PCI seem to have in common.

The CFA believes that keeping liability minimums at 25/50/25–which would provide $75,000 in total liability coverage–or below might help lower costs slightly and make them more affordable to LMI households.

The authors also posit that these lower limits might entice uninsured drivers to get coverage and end up bringing costs down for all drivers.

Industry groups like the III, however, have noted that many state-mandated minimums may be too low to protect all of a person’s assets in a serious accident. And those with low minimums who do cause a serious accident could have to pay for the remaining damages out of pocket and be driven into debt.

Expanding Low-Income Programs

The report’s authors laud states like California and New Jersey for coming up with programs to help residents get coverage for cheap if they meet certain eligibility requirements related to income levels and driving history.

“When such plans exist,” the authors argue, “it is easier to morally justify rigorous enforcement of mandatory liability laws.”

But they go on to say that access to these programs are limited and need to be expanded.

“California’s program provides only liability protection and has even fewer [than 20,000] participants even though millions of drivers are uninsured,” they write.

The III’s Hartwig responded to the issue by noting the low enrollment in the California program and saying it indicates that the private market is already meeting consumers’ needs.

Tightening Regulation

While the CFA report acknowledges the fact that state regulatory departments do not allow insurers to take income level into account when setting rates, the authors say that factors like occupation, geographic location, education level and credit history are serving as proxies for income.

But industry groups say that these factors help indicate a policyholder’s level of risk, not income, and that they simply help insurers price risks more accurately.

The CFA also says regulators need to investigate whether rating factors discriminate against certain groups–even though a handful of state regulatory departments and the Federal Trade Commission have already done this for credit scoring–investigate claim settlements to see if they favor higher-income drivers and look into insurers’ charging more money for less coverage.

“Only state regulators can take the lead in mitigating these problems,” the authors conclude.