Good Driving Means Lower Premiums, Right? Not Always: Report

Four of the five largest auto insurers in the nation sometimes hike drivers’ premiums for accidents they didn’t cause, a new consumer report finds.

State Farm, the nation’s largest auto insurer, was the only one of the country’s five largest auto insurers that did not raise premiums in the tested states on not-at-fault drivers following an accident, the Feb. 13 Consumer Federation of America (CFA) study found. Meanwhile, Allstate, Farmers, Geico and Progressive raised rates on drivers not at fault across at least 8 states, the study found.


The study points toward a trend of auto insurance companies using factors that are unrelated to a driver’s risk in order to set prices, officials for the CFA, which has conducted similar studies, said on a press call with reporters following the report’s release.

Using non-risk based factors to set auto insurance rates is prohibited under states’ rules—and insurers have long said they do not use factors unrelated to risk to set rates.

But, whether all of the many factors insurers use in determining rates are legitimately risk-based has developed into a major point of contention between consumer advocates and underwriters, especially in recent years, as the use of big data gives insurers access to more information on consumers than ever.

Consumer groups are calling for state and federal investigations into the legitimacy of insurers’ rate-setting tactics and, at the federal level, examinations of auto-insurance affordability. The Dodd-Frank created Federal Insurance Office—of which state regulators and some industry groups recently called for the elimination—released the first report in what is supposed to be an annual look into auto insurance affordability in January.

CFA highlighted the broad impacts of its findings.

“This unfair penalty affects everybody in the country,” Doug Heller, an insurance expert with CFA told Bloomberg BNA after the press call. Addressing drivers of all socioeconomic statuses, Heller said their premiums could go up “if you’ve done nothing wrong but were caught up in somebody else’s reckless driving.”

“We have long criticized the insurance industry for using factors that don’t have anything to do with driving,” Heller said.

The study focused on New York, Maryland, Minnesota, Florida, Kansas, New Jersey, Chicago, Georgia, Oklahoma and California. It is illegal in California and Oklahoma to raise not-at-fault drivers’ premiums after an accident, CFA found.

Industry Pushback.

Industry interest repudiated the CFA’s study, which suggested that rates were determined using factors unrelated to risk.

The study’s findings were misrepresentative and unreliable because, among other reasons, the CFA’s hypothetical profiles used in the study included differences in existing-coverage status, Dave Snyder, vice president of international policy with the Property Casualty Insurers Association of America (PCI), said.

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The National Association of Mutual Insurance Companies criticized the report with similar critiques, and at least three industry groups said that all the study proves is that it is a good idea for consumers to shop around: the study indicated that shopping around scares an existing insurer into offering lower rates while letting consumers really see which would give them the best deal, with quotes often varying widely from company to company.

For the study, CFA created and compared dummy-profiles using insurers website portals. Some comparisons used hypothetical insurance shoppers in which the only difference was the driver having no accident on record versus that same driver having an accident on record for which they were not at fault.

Other tests involved setups in which one of the potential customer’s profiles was changed to reflect a driver whose background correlated with factors indicative of lower socioeconomic status versus the same driver with indications of higher socioeconomic status. Both drivers had the not-at-fault status. The not-at-fault driver was charged more on average, the study found.

Insurers took particular aim at a factor concerning preexisting coverage, saying it could make a major difference in premiums because loyal customers can be rewarded with discounts while customers without coverage are an unknown quantity whose driving background could be more risky.

The preexisting coverage factor being different across lower-income and upper-income test profiles “severely skews the analysis,” Snyder told Bloomberg BNA Feb. 13.

The person may not have had coverage because their license was suspended or other reasons associated with riskier drivers, he gave as an example.

On the other hand, “If you don’t have coverage for perfectly legitimatize reasons, like you were serving in our military, or your car was broke and you couldn’t fix it, you shouldn’t get penalized for that,” CFA’s Heller told Bloomberg BNA. “But you do.”