The new auto insurance pricing study from the Consumer Federation of America (CFA) is getting roundly criticized by insurance industry representatives.
The representatives say that states’ auto insurance marketplaces are highly competitive, with most drivers having dozens of auto insurers competing for their business.
The study — released Monday by the Washington, D.C.-based consumer advocacy group CFA — has been getting wide media coverage. The report has been cited in a number of major news outlets since yesterday including the New York Times, CBS News and Forbes.
The CFA report looked at the five largest auto insurers in the country — State Farm, Allstate, GEICO, Farmers, and Progressive — and argued that these insurers, with the sole exception of State Farm, routinely use “non-driving-related” factors such as income level and education in their pricing decisions. The consumer group alleged that this practice can often result in safe drivers with good driving records paying higher premiums.
The study also cited what it described as wide price discrepancies in premiums quoted for drivers with similar records and said the auto insurance marketplace is “highly uncompetitive.”
The study used two hypothetical drivers — an “executive” and a “receptionist” — and sought insurance quotes in 12 cities using websites of the five largest auto insurers. The cities included in the study were Baltimore, Washington, D.C., Atlanta, Tampa, Cleveland, Chicago, St. Louis, Denver, Houston, Phoenix, Los Angeles and Seattle.
I.I.I.: Auto Insurance Expenditures Continue to Drop
In responding to the CFA study, the Insurance Information Institute commented that most drivers have dozens of auto insurers constantly competing for their business. “The price is risk-based, and always will be,” said Dr. Steven Weisbart, a senior vice president and chief economist at the I.I.I.
The I.I.I. said the National Association of Insurance Commissioners found that the typical U.S. motorist had seen his or her annual auto insurance expenditures drop to $791.22 in 2010, more than 3 percent less than they were paying in 2006 ($817.99), according to the NAIC’s 2009/2010 auto insurance database report.
The Institute also said that state insurance regulators already review and approve various rating criteria (e.g., a driver’s age, gender and, in some instances, credit-based insurance scores, and education and occupation) that auto insurers are allowed to employ when pricing a prospective or current policyholder’s policy.
Auto insurance policyholders also have a degree of control over the price they pay for coverage, the I.I.I. said, since the premium is determined in part by their driving record, the type of car they drive and the miles they drive each year. These rate-setting variables were downplayed in the CFA analysis, the I.I.I. said.
“As anyone who watches television commercials knows, auto insurance coverage is widely available in every U.S. state. And competitive marketplaces drive down prices. Drivers should shop around if they feel as though their current auto insurer is not meeting their needs, or is charging too high a price,” said Dr. Weisbart.
Further, the I.I.I. said many consumers are volunteering to have telematic devices placed in their vehicles. These usage-based programs give drivers a financial incentive to drive less and, depending on the information that is monitored, to drive more carefully.
NAMIC: CFA’s ‘Report’ Is Not a Report
The National Association of Mutual Insurance Companies (NAMIC) had even harsher words for the CFA’s findings, suggesting what the consumer group published shouldn’t even qualify as a report.
“CFA’s ‘report’ is not a report; it’s a press release,” said Robert Detlefsen, vice president of public policy at NAMIC.
“A report that describes research findings should contain, at minimum, a detailed description of the research methodology that was used, including an acknowledgement of any limitations that could influence the findings. CFA’s press release provides none of this.”
Detlefsen argued that CFA erroneously suggests what it calls “non-driving-related” rating factors are not predictive of risk. “The only evidence it offers for this assertion is a public opinion survey. CFA simply assumes that the only relevant risk factors are those involving accident history. CFA’s entire critique is based on this one false assumption,” he said.
Detlefsen pointed out that CFA makes no attempt to determine the relative weight the five insurers in its study assigned to the various risk factors cited.
“For example, the fact that its imaginary ‘receptionist’ had been without insurance coverage for 45 days may explain much of the variation in the quotes that CFA says it obtained,” he said.
One way to test this would be to perform a series of experiments in which the receptionist and the executive are given different mixes of risk variables, Detlefsen said. “For example, what would the quotes look like if the ‘executive’ had been without coverage for 45 days, while the ‘receptionist’ had continuous coverage?”
“When pressed by a reporter about the report’s lack of methodological rigor, CFA replied that its work had been ‘labor intensive,’ suggesting that CFA would be incapable of doing a proper study. Such a response underscores CFA’s lack of credibility,” NAMIC’s Detlefsen said.
Detlefsen also argued that CFA limited its inquiry to just five companies, aiming most of its criticism at four of them and ignoring the fact that dozens of insurers compete in the 12 cities it focused on.
Progressive: ‘We Work to Price Accurately’
When asked for comment, Progressive spokesperson Jeff Sibel told Insurance Journal that the company works “to price each driver’s policy as accurately as possible, so that every driver pays the appropriate amount based on his or her risk of having an accident.”
“We use multiple rating factors, which sometimes include non-driving factors that have been proven to be predictive of a person’s likelihood of being involved in a crash,” Sibel said.
He added that there are ways for consumers to take their insurance rates into their own hands by utilizing tools like usage-based insurance.
“For example, our usage based insurance program, Snapshot, is a voluntary program available in 43 states and Washington D.C. It gives customers more control over their car insurance costs by offering personalized discounts based on their actual driving behavior,” the spokesperson said.
“In our Snapshot program we’ve found that actual driving behavior is the leading variable in predicting a driver’s risk. Behaviors that Snapshot measures includes the time of day you’re driving, the amount of miles you drive and how many hard brakes you make.”
State Farm, Allstate and Farmers declined to comment on the CFA study and directed media inquiries to the I.I.I.’s response. GEICO could not immediately be reached for comment.