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Auto insurance discrimination or good business? Advocates say certain pricing strategies are unfair to the poor

insurance discriminationConsumer advocates are at odds with some pricing practices that they are calling auto insurance discrimination, and that they say target low-income drivers and drive up their premiums.

Insurance professionals dispute those claims and say their practices are not auto insurance discrimination, but instead are strategies that are based on complex risk-based calculations that take into account a mountain of data that was never available in the past.

Still, some consumer advocates, and an increasing number of state legislatures, are crying fowl, saying that these new underwriting techniques are just clever ways of charging low-income drivers more for their policies.

The issue that is raising the most controversy right now is so-called “price optimization,” said Bob Hunter, director of insurance for the Consumer Federation of America.

What is insurance price optimization?

Price optimization is when insurance companies use complex algorithms to set their premium costs. Consumer groups say the practice examines whether a customer is likely to shop around for a better deal or whether they will be more likely to just accept a rate increase without protesting.

Hunter says this technique is auto insurance discrimination and should be illegal because it is basing auto premiums on factors outside of the driver’s risk.

“If you have two people with identical risk, and one shops and they get different rates, then that is illegal,” Hunter said.

According to the National Conference of State Legislatures, 11 states and the District of Colombia agree with the Consumer Federation on this. To date, California, Washington, D.C., Delaware, Florida, Indiana, Maine, Maryland, Ohio, Pennsylvania, Rhode Island, Vermont and Washington have all banned the practice.

The National Association of Insurance Commissioners is weighing in on the matter, too. Earlier this year the group issued a draft white paper on price optimization, and will be holding a hearing on the issue later in 2015.

But from the industry’s point of view, there seems to be a lot being made about a non-issue. The Insurance Information Institute, a trade group funded by the insurance industry, cites a report showing that only 12 percent of insurers are actually using price optimization for personal lines like auto insurance.

The III also says that consumers don't seem to be complaining about the issue and that they ultimately care more about the price they are paying for insurance and whether they like the product and service — if consumers feel pricing is unfair, then they will shop around.

The Consumer Federation’s Hunter said that one of the primary concerns in play is that low-income drivers are more vulnerable because he says they are actually less likely to shop around for coverage than savvier, higher-income drivers are.

That is a point that the III disputes. They cite a survey they conducted in 2014 that showed that people who make less than $35,000 were actually more likely to shop for a better insurance deal than higher income drivers.

Still, Hunter says the issue comes down to fairness.

“How you shop has nothing to do with how you drive,” he said.

Other issues

Price optimization isn’t the only pricing practice that is being called discriminatory. A report put out earlier this year by the Pew Charitable Trusts also points to common pricing tactics, such as using credit scores, occupation and education level as other potential forms of auto insurance discrimination.

Hunter says that insurers commonly argue that those factors are valid variables to use when pricing insurance, because the insurance industry says they all correlate with how risky a driver behaves, but he and the Consumer Federation have their doubts.

“If you are shopping for insurance as an MBA CEO, you get one rate. But, if you substitute a janitor with a high school diploma, but everything else is the same — the car, the driving record, all of that — your rate goes from $1,000 a year to $3,000 a year, and that isn’t fair,” Hunter said.

Regulators are also keeping their eye on these kinds of practices. According to the National Conference of State Legislatures, three states — California, Hawaii and Massachusetts — say that credit scores cannot be used to set auto insurance rates, and another 24 states have recently examined the issue.

This year alone, according to the NCSL, 10 states have taken up pieces of legislation related to restricting the factors rates can be based on. For example, Michigan has a piece of pending legislation that would prohibit setting rates based on employment, trade, business, occupation, profession, education level, credit history or the territory in which the driver lives or works.

Minnesota also has pending legislation that would prohibit the use of credit scores in auto insurance pricing.

New Jersey has pending legislation that, if passed, would prohibit using education and occupation as rating factors.

The bottom line, says Hunter, is that every state has said that income cannot be used to set insurance rates, but what is actually happening is that these other pricing practices end up acting as proxies for income, and the end result is the same as if income was the primary variable, he said.

“It would be bad enough if there was just one practice in question here, but there are like 10 of them,” Hunter said.

But the III says that the reality on the ground is actually much rosier for consumers. Auto insurance is a highly competitive, highly regulated business, they say. The vast majority of drivers have a large number of insurance companies to choose from — and shopping for insurance has never been easier.