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NEW YORK, August 3, 2015 — Recent surveys of insurance pricing by the Consumer Federation of America (CFA) and Consumer Reports have made headlines by purporting to demonstrate that auto insurers use rating factors unfairly. However, the studies are misleading and overlook the importance of using a wide variety of rating factors in order to maintain a competitive market that ultimately benefits consumers.
While the CFA research indicated that auto insurers generally charge married women less for state-mandated liability coverage than they do female policyholders who are divorced, separated, single or widowed, Consumer Reports decried the use of any rating factors other than an individual’s driving record.
The reality is that the practices highlighted in both reports have repeatedly been found to be appropriate by state legislators and insurance regulators.
Insurance companies have for decades adjusted rates based on information other than driving record. Actuaries have seen that some variables unrelated to driving record can predict the likelihood of an accident more accurately than can be achieved by simply examining an individual’s driving record. This is why men typically pay more for insurance than women and why teenagers pay more than the middle aged.
Even the use of credit-based insurance scores, which the Consumer Reports article decries, is a well-tested way of predicting the likelihood that a driver will eventually file an insurance claim. Indeed, the federal government looked at credit scoring almost a decade ago and, in its 2007 report, concluded that “credit scores are effective predictors of risk under automobile policies.” A number of state insurance regulators have reached the same conclusion.
Insurance companies are required by law in every state to use data to show that all discounts and surcharges reflect the underlying risk of insuring that set of drivers. Their analyses are filed with and approved by state regulators.
So what Consumer Reports calls a “troublesome industry practice” is something that actuaries have had to defend and prove in every state. These rating factors have been tested tens of thousands of times. If they were unfair and did not work, companies would abandon them and regulators would forbid them.
The idea of basing one’s premiums on driving record alone may be attractive to some drivers. Unfortunately, it doesn’t work particularly well, at least not as well as factoring in age, gender, marital status, credit score and other variables, particularly when these last are taken together.
There may be a day, not far away, when insurance companies will plug telematics devices into a car’s computer. And this may turn out to be a better and cheaper way to predict risk than the powerful tools most insurers employ today. Many companies are researching that promising technology, and some companies already offer it on a limited basis.
In the meantime, most in the insurance industry agree with industry detractors on at least one thing: Consumers who believe they are being overcharged or underserved by their insurance company can, and should, shop around for a better deal. What they will find is that the auto insurance industry is highly competitive, precisely because different insurers give different weight to various underwriting criteria. This creates a vibrant marketplace where consumers will find an array of auto insurance policies and prices to choose from.
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