Consumer Group Accuses Geico of Unfair Underwriting Practices

By Andrea Ortega-Wells
March 21, 2006

A U.S. consumer group has made claims that Geico Corp. uses rate-making methods that directly base eligibility and premiums solely upon the educational background and occupation of consumers.

The Consumer Federation of America says that it uncovered a Geico underwriting guide showing that the company, the nation's 4th largest auto insurer, has adopted rating methods and underwriting guidelines in 44 states that directly base rates and eligibility for auto insurance solely upon education and occupation. The CFA says that the use of this information results in an "unjustifiable increase in insurance rates for many lower income and minority consumers" and is calling on insurance regulators to ban the practice.

In a letter sent to the National Association of Insurance Commissioners (NAIC) on March 17, the CFA and New Jersey non-profit insurer NJ CURE noted that insurance commissioners often do not collect or review underwriting guides, so it is likely that these methods have been overlooked.

Geico, a subsidiary of Warren Buffett's Berkshire Hathaway Inc., called the allegations "patently false and intentionally divisive."

"The use of education and occupation to underwrite and price is a long-standing industry practice," Geico said in a statement. Geico says it uses these and other criteria to accurately differentiate risks. "Every criterion, including occupation and education, used by Geico reflects its actual loss experience nationwide over many decades," the company said.

However, J. Robert Hunter, Director of Insurance for CFA and a former Texas Insurance Commissioner, says Geico is "pulling an underwriting sleight-of-hand that allows it to skirt existing prohibitions on the use of income and race to determine insurance rates and eligibility." Hunter claims that education level and occupation are directly linked to income, which cannot be used in determining insurance eligibility or rates because of its impact on lower income and minority consumers.

Hunter says that under Geico's underwriting methods a factory worker without a four-year college degree in New Orleans who has the same qualifications and driving record as an attorney with a professional degree would pay 90.75 percent more for coverage.

Geico claims it has justified its use of educational and occupational criteria with U.S. insurance regulators for many years.

"Insurers are constantly looking for ways to ensure that there is a close relationship between a consumer's premium and the potential risk of loss that they take on," said Joseph Annotti, senior vice president of public affairs for the Property Casualty Insurers Association of America.

"In order to price insurance, Geico uses a combination of several dozen factors," the company said. "No single criterion is ever used to determine a customer's rate. … Income or race based criteria never has a role in underwriting or pricing."
"Driving experience, past loss history, age, gender and marital status are widely accepted rating factors that have been approved by state regulators because they are accurate predictors of future losses," Annotti added. "Reams of evidence prove that women, married people, and experienced drivers have fewer losses and, as a result, pay lower premiums. Demographic factors such as occupation operate in exactly the same manner."

"It is very troubling that GEICO appears to rely on these guides as a de facto rating method that would normally require approval by departments of insurance and be included in rate manuals that are usually made public," Hunter said. "Keeping underwriting guides concealed allows insurers to engage in unfair practices like these."

Hunter added that the CFA/NJ CURE "have recently discovered that Liberty Mutual Insurance has also adopted educational attainment as a method of underwriting and rating as well. Allstate has begun to use such factors in four states."

However, Geico contends that such underwriting criteria are valid tools for cost-based pricing and they are being used in a fundamentally fair manner.

"Allowing companies to use a wide range of underwriting and rating tools promotes market competition and choice and ultimately drives down the cost of insurance for consumers," Geico says.

Arbitrary restrictions on actuarially justified rating and underwriting factors harm the insurance marketplace by stifling competition and innovation, according to PCI.

"The bottom line is that consumers benefit when insurers seek to find more accurate ways to match rates to risk and when there are a variety of options in the marketplace," Annotti said. "These strategies drive competition among insurers and that helps consumers by providing fairer rates and lower overall prices."