Good drivers of "lower economic status" can pay nearly twice as much for auto insurance than higher-income drivers. That comes to about $600 to $900 more per year for the first group, according to a survey conducted by the Consumer Federation of America (CFA), a nonprofit consumer advocacy group.
The CFA said the nation's second- and fourth-largest car insurers by premiums written, Geico and Progressive (PGR), respectively, have the largest percentage increases, 92 percent and 80 percent, respectively, for lower-income drivers. The third-largest, Allstate, and the fifth-largest, Farmers Insurance, obtain the largest annual dollar increases, $915 and $900, respectively, from this group. But the country's largest auto insurer, State Farm, charged relatively smaller increases to lower-income applicants, the CFA said.
The Insurance Information Institute (III), which represents the property-casualty insurance industry, was quick to criticize the CFA study as "cherry picking" to get the results it wanted.
"It's hard to draw a comprehensive conclusion when you are only looking at five insurance companies and just 15 cities," said III Chief Actuary James Lynch, adding that, "There are over 300 insurers out there."
The CFA created four "driver profiles" based on a married female bank executive who's a homeowner with a master's degree versus a single female bank teller with a high school diploma who rents. Conversely, the same description basically fit the two males. The higher-status applicants also had an insurance track record with the same company for three years, while those with the lower status didn't have insurance for six months.
Then the CFA applied online to see the difference in rates and found that drivers in Atlanta, Boston, Houston, Jacksonville, Jersey City, New Jersey, Minneapolis and Queens, New York, faced the "steepest" increases for having been classified as poorer potential clients. They all would have to pay more than $700 on average for car insurance, which is mandatory in almost every state.
"The cumulative impact of this increase over years is startling," said CFA Director of Insurance J. Robert Hunter.
CFA Executive Director Doug Heller expressed "deep concern" that the websites of some of these insurers simply blew off the lower-income applicants and wouldn't even provide them with an insurance quote.
Lynch said most websites require a Social Security number, and because the applicants were fictitious, that would've put a stop to the process. He also said the study was flawed because many car insurance applicants use an agent or apply by phone, which the CFA study couldn't measure.
But Lynch didn't dispute the basic premise that some socio-economic factors such as marital status, job and education factor into an auto insurer's decision on who gets a policy, and at what price. "They are predictive of losses," he said.
The CFA's J. Robert Hunter said the only factors that should go into an auto insurer's decision are the applicant's driving record, moving violations and accidents. A poll conducted by the CFA this year agrees with him.
Lynch said insurers have to use other criteria because three out of four drivers have clean driving records. He even cited a poll that shows 98 percent of all drivers think they're average or above.
"But that's the Lake Wobegon effect, where every parent thinks their child is above average," said Lynch. "By definition, 50 percent of all drivers are below average, and 7 percent have accidents every year. Insurers have to sort out who's going to have an accident and who won't."
In other words, it's not what you did in the past; it's what your insurance company thinks you're going to do.
But none of this impressed Hunter, who said insurers seek upper-income clients because they can be sold multiple products, such as home insurance and financial services. "The marketing people are driving this," he said.