Consumer group accuses Geico, other insurers of unfair underwriting

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 fourth 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 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.

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 insurer said in a statement. “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.

Jeff Brewer, also of PCI, said the practice of using education and occupation in underwriting is not a uniform practice among all insurers. “You’ve got some companies that have used it and used it for years; and there are other companies who don’t use it,” he said.

Agents not concerned
While independent agents have criticized insurers’ use of other underwriting criteria, such as credit scoring, in the past, the use of education and occupation as an underwriting criteria shouldn’t be a problem if used responsibly, says Wes Bissett, a spokesperson from the Independent Insurance Agents and Brokers of America.

“The credit debate really took off because companies were using credit almost exclusively,” Bissett said, which is not the case when insurers use education and occupation in underwriting. “As long as these factors, like numerous others, are used as tools and used responsibly, right now it’s hard to call for their complete elimination.”

One thing agents would be concerned about is the fear that increased legislative or regulatory intervention might stifle competition.

“New Jersey has had a complete turn around of its auto insurance marketplace in the last two to three years,” Bissett said. “The reason for that is that government has essentially gotten out of the way and allowed the market to thrive. The thing that we fear is that government will get back in and micro-manage and then we will see a reduction in competition.”

Bissett says that insurers are merely looking for ways that allow them to underwrite and rate more effectively and more appropriately. “And if this is not one that works then competition will soon figure that out for them,” he said. “It’s interesting to note that the New Jersey department [of insurance] reviewed Geico’s filings and I assume those of others and found that there is actuarial support for the use of those criteria.”

But CFA’s Hunter says it’s “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.”

Other insurers called out
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 maintains 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, according to PCI. “The bottom line is that consumers benefit when insurers seek to find more accurate ways to match rates to risk,” PCI’s Annotti said.

Topics Carriers Agencies Profit Loss Underwriting New Jersey Training Development