Auto insurance giants Allstate, Farmers, and American Family charged higher premiums to good drivers previously insured by smaller “non-standard” insurers than those who had coverage from primary competitors, according to the Consumer Federation of America (CFA).
“This practice especially penalizes motorists in lower-income communities, leaving them with few options outside of lesser-known and often higher-priced insurance companies,” J. Robert Hunter, CFA’s director of Insurance and former Texas insurance commissioner, said.
CFA tested whether premium quotes from seven of the nation’s largest insurers in 20 cities differed if customers switched from non-standard insurers rather than from another large insurer. CFA only sought quotes for a customer who had a perfect driving record, regardless of their prior carrier.
It found that three of the companies – Allstate, Farmers, and American Family – used a customer’s prior insurance company as a factor in determining the premium charged. Allstate charged 15 percent more on average to good drivers previously covered by non-standard auto insurers than if they had been previously insured by a larger company like State Farm. Farmers and American Family both charged nine percent more in the same scenario.
CFA’s testing also found that several other large companies – State Farm, Progressive, and Liberty Mutual – did not increase rates in response to customers’ prior companies.
“It’s one thing to charge higher premiums to people with violations and accidents in their past, but it is unfair to punish a good driver simply because of where she previously purchased insurance,” Hunter said. “After big insurers underserved many of America’s poorer communities, forcing drivers to turn to lesser known companies to buy coverage, the same big insurers later penalize them, effectively sentencing them to higher premiums for life.”
Non-standard insurance companies sell coverage to the riskiest customers and those in low-income or minority communities that often are not served by the larger players, according to CFA. Non-standard insurers sell about $7.5 billion in auto insurance in the United States accounting for about seven percent of the entire auto insurance market.
The study cites a recent report from the Treasury Department’s Federal Insurance Office (FIO) that said approximately 18 million Americans living in lower-income and predominantly minority ZIP codes face unaffordable auto insurance premiums.
David Snyder, vice president of policy development and research at Property Casualty Insurers Association of America (PCI) said insurance companies follow state law by charging prices solely based on risk and do not engage in socio-economic pricing.
“Consumers should be assured that auto insurance pricing is closely scrutinized by state insurance regulators and is subject to rigorous actuarial standards, which ensure that all rating factors comply with the law.” Snyder said. “For the companies that consider the type of prior insurance, it is one of many factors used in determining a person’s rate, and it is supported by the loss experience of those customers. Data shows customers moving from a non-standard policy can have a higher likelihood of future losses than those who come from other companies. As a result, their rates are different to reflect the different levels of risk. The use of this as one of many other rating factors has been approved by state regulators.”
Snyder also noted that the FIO study cited by CFA found that auto insurance is affordable in more than 90 percent of low and moderate income and minority zip codes.