Low-income drivers are routinely charged higher auto insurance premiums than well-heeled car owners. But why should the poor pay a premium when it comes to premiums? Is the system inherently unfair? Or are there valid reasons why poor drivers tend to represent bigger risks for insurers?
The Consumer Federation of America just released a study entitled “Lower-Income Households and the Auto Insurance Marketplace: Challenges and Opportunities.” Insurers analyze many factors to assess what level of risk a driver poses, and therefore what kind of rate he or she must pay, but, the report notes:
No states … permit the use of race or income in rate-making.
Nonetheless, the net result of factoring in elements such as occupation, education, location of residence, and credit history is that the poor are largely deemed as higher risks, and low-income drivers are charged higher rates. The CFA report says that this state of affairs makes auto insurance unaffordable for many low-income households. The inability to afford a car also places them at a major disadvantage in terms of economic opportunity, restricting where they can work, shop, find daycare, and go to school.
So the poor get screwed. Not much new there. But the CFA claims that the way insurance companies come up with rates isn’t just unfortunate — it’s unfair.
After examining tons of literature on auto insurance, the study’s authors call attention to several factors that aren’t taken into account by insurers, and that should, in theory, lower the risks for low-income drivers. For instance, poor drivers—because they’re poor and don’t have much money for gas and car upkeep—usually drive a lot less than their high-income counterparts. Households with incomes of around $40K and under drive about half the miles annually that the richest 20% drive. Less time on the road equals less chance of getting into an accident, hence less overall risk.
The CFA also makes the case that low-income drivers have far fewer options for insurance. Several insurers won’t sell insurance to “certain types of car owners,” the report states, and insurance agent offices are almost nonexistent in poor neighborhoods. As odd as it sounds, insurers in a few states have been known to charge cheaper premiums for standard liability coverage than they do for minimum liability—which is the option often deferred to by low-income drivers.
The CFA argues that it is unfair to incorporate factors such as occupation, location of residence, and credit history into auto insurance rates because it has not been “adequately demonstrated to regulators that these correlations exist or that they adequately reflect risk.”
In any event, exactly how much extra do low-income drivers pay for auto insurance? The CFA doesn’t really offer a number. Even coming up with estimates for the average driver’s annual premium is problematic, and the CFA cites figures such as $901 per car (2009 nationwide average), $1,379 per household (2007 numbers that also average in carless homes), and $1,724 to $1,970 (estimates just for households that actually own cars). The report does give examples, though, such as a single male in the Los Angeles area with a less-than-perfect driving record who could expect to pay annual premiums of $1,628 to $2,353 if he lived in the poor area of Compton, as opposed to $1,334 to $1,734 if he lived in well-to-do Sunnyside.
Presumably, crime rates—including auto theft—are higher in low-income neighborhoods, so it would seem like location of residence is a legitimate risk factor. Does that risk justify charging an extra $300 or $600 per year because of where someone lives? The CFA says no, and it’s calling for all sorts of programs that’ll help make insurance more affordable for the poor.