If you believe the ads, good drivers get the best insurance rates. But a new study shows auto insurers frequently charge good drivers higher premiums than those who recently caused an accident. And it appears from this research that the safe drivers who pay more are often lower income.
How could this happen?
The Consumer Federation of America (CFA), which conducted the study, says this reflects a common practice in the insurance industry of using factors such as education and occupation to rate risk.
A CFA survey in 2012 found that two-thirds of American believed considering these factors, rather than driving history was unfair.
Stephen Brobeck, CFA's executive director, calls this a "discriminatory practice" that raises the rates for low-and moderate-income drivers.
The industry rejects any notion that it discriminates in any way.
"The policies we offer are fair in every way," said Michael Barry, vice president of media relations at the Insurance Information Institute.
How CFA surveyed the marketplace
The CFA priced policies for two hypothetical customers: a high school receptionist and an executive. Both women were 30-years old, had driven for 10 years, lived on the same street in the same middle-income ZIP code.
But there were important differences.
The receptionist is single and rents an apartment. She has never had an accident or moving violation, but she was without insurance coverage for 45 days.
The executive is a married homeowner with a master's degree. Her auto insurance has never lapsed. But, she had an at-fault accident with $800 of damage within the past three years.
CFA researchers visited the websites of the five largest U.S. auto insurers – State Farm, Allstate, GEICO, Farmers and Progressive – looking for the minimum liability coverage required by that state. This was done for both women in 12 cities.
The results: Two-thirds of the 60 quotes were lower for the executive (who had an accident) than for the receptionist (who had none), often by 25 percent or more.
The Insurance Information Institute questions whether the test was fair because the receptionist had a break in insurance coverage and that could be seen as a risk factor. The Consumer Federation of America says the receptionist didn't have a car for 45 days and therefore didn't need insurance. Does that make her a riskier drive, they ask?
Why is this happening?
Insurance companies consider a variety of factors to determine the risk you pose and the price they should charge when you apply for an auto policy. Everyone agrees your age, sex, type of vehicle and driving history can help predict the likelihood that you will have an accident.
But should insurance underwriters consider your education, occupation or in some cases, your credit score? What do these socio-economic factors have to do with your ability to be a safe driver?
"These factors have been found to be actuarially sound ways to assess risk," said Michael Barry, vice president of media relations at the Insurance Information Institute. "And before they are ever used, these rating criteria are vetted by state insurance regulators who have allowed them."
The CFA says it's not fair for someone to get a better rate simply because they have more education and more income.
"Our concern is that these factors are not proven; there is no logical reason to explain why they should work," said Robert Hunter, CFA's director of insurance and former Texas Insurance Commissioner. "The insurance companies say there's a correlation and that's all they need."
Some insurance companies now consider your credit scores when setting your premiums. That doesn't sit too well with Washington State Insurance Commissioner Mike Kreidler, who calls the practice a "blatantly unfair" way to assess risk.
"I think it's terrible," Kreidler told me. "Using a credit score in this economy? You have people who through no fault of their own have wound up with less quality credit and yet are still responsible drivers. They shouldn't pay more for auto insurance because of that."
Not in sunshine state
The California Insurance Department decides what ratings factors can be used by auto insurers to calculate auto premiums. Education, occupation and credit scores cannot be considered.
"We want rating factors that have a relationship to the risk of loss," said Joel Laucher, California's deputy insurance commissioner for rate regulation.
"You want something that's fair and fairly intuitive so people understand why there would be a price difference. It should be something the driver can control and realize how they can amend their behavior to improve their rate."
Massachusetts also restricts the use of socio-economic factors for private auto insurance.
"There was a determination made that auto insurance should more tightly track an individual's driving," said Massachusetts Insurance Commissioner Joe Murphy.
The bottom line
There are a lot of insurance companies competing for your business. Rates vary greatly.
A good place to start is your state insurance department's website. Look for a comparison chart that lists the rates in your area for various hypothetical customers. It's a simple way to see how various insurance companies compare and where you might want to go to get a quote.
(Find a link to your state's insurance department at: National Association of Insurance Commissioners.)
You can get quotes from an independent agent who represents various companies or go online and do it yourself at sites such as InsuranceQuotes, InsWeb, NetQuote, InsuranceHotline or Answer Financial. Don't expect an instant quote from these sites. In most cases, you'll be contacted by agents looking for your business.