American Property Casualty Insurance Association
  • Staff Contact: Nicole Mahrt-Ganley     
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  • November 18, 2015
  • Auto Insurance Rates are Based on Cost Drivers, Not Race

    PCI counters faulty CFA Research, Insurers do not use race or income data

    Chicago, Ill – The Property Casualty Insurers Association of America issued the following statement today in response to a new study by the Consumer Federation of America regarding auto insurance costs in African American communities. The following statement can be attributed to Robert Passmore, PCI assistant vice president, personal lines policy.

    “As good corporate citizens, insurance companies serve local communities all across the country to ensure that the lives and property of all residents are safe, secure and well protected against the risk of loss. We reject the CFA’s conclusions and believe there is no foundation to assert that insurance rates are based on race or any other socio-economic factor. Insurance rates are color-blind and solely based on risk. States have strong anti-discrimination laws and regulators have a full toolbox of enforcement tools which they are not hesitant to use. 

    “Once again, the CFA fails to recognize that it is the number of claims and their costs that drive insurance prices. Urban and other high cost areas may face higher insurance rates because there is greater traffic congestion, more accidents and injury claims reported, higher medical expenses and repair costs, fraud, and more expensive legal representation and related fees. As a result, people living in cities tend to pay more for auto insurance than people living in the suburbs or rural areas. Some rural areas face high litigation costs therefore they face higher rates.  Anyone living in a high cost area will incur the same rates based on the costs in that region. Any variation in rates will arise from other rating factors that contribute to the price of auto insurance such as the limits purchased, number of miles driven, policyholder’s driving history, the number of vehicles insured, and the type of vehicle insured, credit history, or young drivers in the household.

    “The CFA also argues that the use of rating factors such as credit history unfairly impacts African Americans. However, a 2005 Texas Department of Insurance study on credit scoring and a new 2015 study co-authored by a National Association of Insurance Commissioners-funded consumer liaison from the University of Minnesota conclude that credit-based insurance scores are not based on race, nor do they act as a proxy for race or income. Studies over the past two decades by federal and state regulators, universities, independent auditors and insurance companies have all shown an individual’s credit history is a proven, accurate indicator of how likely that person is to file a future insurance claim and the potential cost of that claim.  The diversity of rating factors allowed in most states has led to a highly competitive market place and residual market mechanisms that once contained significant percentages of drivers, have very few drivers now.

    “As in any healthy competitive market, there are a range of prices offered to consumers. These price differences occur because of each company’s differing underlying costs, not because of a policyholder’s race. Market competition is good for consumers because it gives them a wide array of insurers from which to choose and allows policyholders to select the best product and price that fits their needs. Rather than levying unfounded allegations of unfair discrimination, organizations like CFA should be focused on strategies and public policy solutions that can help reduce the number of insurance claims—including enforcement of sound distracted driving laws such as text message and hand held cell phone use bans—the kind of activities that are frequently observed in congested traffic conditions. These kinds of efforts keep everyone safe and contribute to lower insurance costs for all consumers.”

    What Others Are Saying –

    • A new 2015 study, co-authored by a National Association of Insurance Commissioners-funded consumer liaison, concludes that credit-based insurance scores do not act as a proxy for race or income. 


    • A 2005 Texas Department of Insurance study on credit scoring found that: “Credit scoring is not based on race, nor is it a precise indicator of one’s race.”


    • A 2004 report issued by the Maryland Insurance Administration also found that there was “insufficient data to conclusively determine whether the use of credit scoring has an adverse impact on low-income or minority populations.”


    Since the mid-1990s there have been numerous studies examining the connection between credit information and the risk of loss. PCI has compiled links to the major studies on this topic.


    The Costs Tell the Story

    There is strong empirical evidence that explains higher insurance rates in urban areas. For example:

    • Based on loss data compiled by the Independent Statistical Service (PCI subsidiary), the insured liability and physical damage loss cost for Baltimore City is 50 percent greater than the statewide average, and 100 percent greater than the loss cost incurred by drivers living in the Eastern Shore. Baltimore drivers report significantly more claims and their claims are much more costly than the claims of drivers elsewhere.


    • The loss costs for the center of Detroit Metro are more than two times higher than the city’s northern part and its suburbs and three times higher than the statewide average. Drivers living in the center of Detroit report a third more claims than average, and their claims cost twice as much.


    • Claim costs and claims reporting are three times greater for New York City drivers than their counterparts in Albany.  And there are differences in claiming behavior in Kentucky, too, as drivers in Louisville report about 20 percent more claims than the statewide average.


    • Furthermore, according to the National Insurance Crime Bureau, drivers in Orlando report one of the highest number of questionable collision claims in the nation, indicating a high occurrence of consumer fraud.

    These patterns are similar for other areas where there is more congestion and higher fraudulent behavior that lead to higher losses. Higher losses mean higher rates regardless of whether a policyholder is African American, White/Caucasian, Latino, Asian American, etc.

  • PCI promotes and protects the viability of a competitive private insurance market for the benefit of consumers and insurers. PCI is composed of nearly 1,000 member companies, representing the broadest cross section of insurers of any national trade association. PCI members write more than $195 billion in annual premium, 35 percent of the nation's property casualty insurance. Member companies write 42 percent of the U.S. automobile insurance market, 28 percent of the homeowners market, 33 percent of the commercial property and liability market and 35 percent of the private workers compensation market.
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