Car Insurers Charge Highest Rates for the Disadvantaged

A recent ValuePenguin survey revealed that 52% of Americans think that it is illegal for insurers to consider their credit history when setting rates for car insurance. How can consumers take better control of financial products that overwhelm or confuse them?

When individuals get overwhelmed or confused, this can sometimes lead to rash, quick judgments that they later regret. Consumers should check their emotions, and if these feelings begin to creep in, they should stop and return to it later if possible. Usually, give 24 hours or a night’s rest on it before making a big decision. Also, read the fine print and ask questions about anything you do not understand. If you are still not satisfied, shop elsewhere. Usually, you will be able to come back if you determine the first product was actually the best one all along.

Mandatory financial products, like car insurance, allow socioeconomic status and geo targeting by ZIP code to influence the price one consumer gets compared to another. Do you believe these non driving characteristics should play a role? Why or why not?

In a perfect world, this would not be the case, but unfortunately certain aspects of price influence are necessary because of risk factors. For example, I live in Seattle, where there are a lot more people, and thus, there is a lot more risk of an accident happening, especially on small cross streets with no signage or dim lighting. So while it may seem that socioeconomic status and geo targeting by ZIP code are non driving characteristics, they can sometimes actually play a large role.

As another example of the socioeconomic factor, one may consider a poor credit score as not pertaining to driving, but individuals under high stress are more likely to make poorer decisions, which ultimately could lead to car accidents.

In recent years, consumers have paid more attention to the social integrity of larger corporations. How does news, such as insurance companies charging disadvantaged drivers more money, play a role in consumer perception?

News such as this in the past would distort a company’s image and give it a black eye so to speak, but today, given movement in our culture based on the current generation’s call for companies to be more socially accountable, this is more of a big deal, especially because there are more choices today than ever before for consumers. This could lead to a mass exodus of consumers, especially if the cost of switching things like insurance remains relatively low from a direct cash cost perspective (but not from an opportunity cost of time!).

Being categorized as "disadvantaged" can spiral consumers down a vicious cycle. For instance, poor credit can lead to higher charges, which then inhibits the ability to save and leads to more debt that drives the credit score down even more. What is one thing that people can do to break free from this cycle?

While consumers may not be able to control what others do to them nor their current environment, everyone is responsible and accountable for their behavior and actions. The one small but big thing I would recommend to break the cycle is to live under your means. For example, if you bring home $40,000 a year, live like you only make $32,000 a year (the 80-20 rule). Whatever is left over can then be used to pay off debt and establish savings.

Be aware that this strategy is long-term but is influenced by daily decisions, so be willing to fail but keep trying. This may also mean having to make tough financial decisions, such as moving to a low-cost neighborhood, downsizing, commuting longer distances, etc. Eventually, your efforts will pay off if you stick with it.

In recent years, consumers have paid more attention to the social integrity of larger corporations. How does news, such as insurance companies charging disadvantaged drivers more money, play a role in consumer perception?

The premise of this question is faulty; that is, the assumption is all consumers have access to all information. We know this is not true. Most consumers are busy navigating life and do not take the time to investigate the companies they do business with. Even with the availability of information on the internet, only small groups of consumers will pay attention to the "social integrity" status of a company. More importantly, consumers make decisions based on the immediacy of the need, risk tolerance and budgetary constraints.

Being categorized as "disadvantaged" can spiral consumers down a vicious cycle. For instance, poor credit can lead to higher charges, which then inhibits the ability to save and leads to more debt that drives the credit score down even more. What is one thing that people can do to break free from this cycle?

There is no one thing that could break this vicious cycle. The mere act of categorizing a group of people subjects them to being viewed as unworthy. A capitalist system that is constructed on consumerism is designed to take advantage of the most vulnerable and also keeps disadvantaged folks in the system through indebtedness. The constancy of indebtedness is connected to low wages, poor housing, food deserts, a failing education system and other ills in the society; no single solution could exist that would solve this multidimensional problem.

A recent ValuePenguin survey revealed that 52% of Americans think that it is illegal for insurers to consider their credit history when setting rates for car insurance. How can consumers take better control of financial products that overwhelm or confuse them?

For consumers to take control of their finances and the financial products they own, they must educate themselves about such topics. There is no substitute for this. Consumers don't necessarily need to understand all the intricacies of what insurance companies are allowed to do, but they should be aware of the major factors involved.

Since insurers have not been especially forthcoming to consumers with what factors are used to set rates for insurance products, consumers should seek out this information on their own. Personal finance websites and podcasts are both excellent ways for consumers to understand this topic and, more broadly, to stay current with their knowledge of financial products.

Mandatory financial products, like car insurance, allow socioeconomic status and geotargeting by ZIP code to influence the price one consumer gets compared to another. Do you believe these nondriving characteristics should play a role? Why or why not?

Insurance companies offering car insurance use factors like driving records when setting rates because history has shown them that consumers' driving history plays a significant role in how likely future insurance claims are to be filed. Most consumers understand this. However, insurance companies have also discovered that factors that are not directly relevant to driving also impact the likelihood of future insurance claims. These include credit scores, location of residence, gender and marital status, among others.

It is logical for insurers to use factors known to result in different risk profiles when setting premiums unless there is a compelling moral or social argument to do otherwise. If one group of consumers represents a lower risk to insure than others, it seems equitable for them to pay a lower insurance premium. Otherwise, the consumers with the lower risk are subsidizing the insurance premiums of consumers with higher risk.

The question then becomes when there is a compelling moral or social argument for such subsidization to occur, and there are no easy answers to that question. However, I suspect that relatively few consumers of car insurance are interested in personally subsidizing the premiums of other consumers.

In recent years, consumers have paid more attention to the social integrity of larger corporations. How does news, such as insurance companies charging disadvantaged drivers more money, play a role in consumer perception?

Large companies have indeed come under greater scrutiny of late, and a number of consumers are increasingly interested in the social implications of these firms' actions. In particular, some have grown more skeptical of any move that they believe is harmful to any group of consumers. However, such situations are more complex than many realize.

For instance, if an insurance company didn't charge higher premiums to customers who are at higher risk of claims, customers with less risk would be subsidizing them. Few such customers are willing to do this, so they would leave that insurance company for another with a more traditional model of setting premiums. And soon, other drivers with relatively high risk of claims would gravitate toward the company. Eventually, the insurance company would have to charge all of its customers a higher premium in order to account for the higher risk, or the company would go bankrupt, and all of its customers would have to go elsewhere. Many consumers don't understand such dynamics and simply focus on the short-term effect of customers with higher risk paying higher insurance premiums.

Being categorized as "disadvantaged" can spiral consumers down a vicious cycle. For instance, poor credit can lead to higher charges, which then inhibits the ability to save and leads to more debt that drives the credit score down even more. What is one thing that people can do to break free from this cycle?

The single most important action people can do to break free of the bad credit cycle is to pay all their bills on time, even if it means making only minimum payments. Consumers' payment history is the single most important factor in determining their credit score, so getting current on all bills should be the primary goal. Once all their bills are current, consumers can then work toward paying down/off debt, which will improve their credit utilization and improve their credit score further.

A recent ValuePenguin survey revealed that 52% of Americans think that it is illegal for insurers to consider their credit history when setting rates for car insurance. How can consumers take better control of financial products that overwhelm or confuse them?

Unfortunately, the way insurance premiums are set depends greatly on the probability of payouts. Thus, an individual’s credit history should play a key role for private insurance products. The solution for it is not to make it illegal to use credit history. The solution should be to provide a low-cost alternative such as the public option for health care. Most Americans are scared into having too much insurance coverage and not taking actions that could lower their insurance premiums (better driving habits for car insurance and taking good care of their own health for health insurance). Having insurance coverage doesn’t mean you should take on more risky behaviors. It should be the opposite. If all consumers lower their chances of requiring insurance payouts, then the premiums will fall.

Let’s take health insurance as an example. If a consumer is taking proactive steps to do annual checkups with their primary care doctor and keep their body weight under control, their chances of needing costly procedures decline drastically. Both of these steps are relatively straightforward and cheap. But they could lower the need for coverage and thus lower their premium. Another issue with health care coverage is the need for more choices. There is a misunderstanding that more choices are better. Empirical evidence from behavioral economics shows otherwise. Having more choices means a lot of redundancies in the system are needed, thus increasing the cost.

So, we as consumers have to do a better job collectively to reduce waste if we want to reduce cost.

Mandatory financial products, like car insurance, allow socioeconomic status and geotargeting by ZIP code to influence the price one consumer gets compared to another. Do you believe these types of nondriving characteristics should play a role? Why or why not?

Again, this has to do with the probability of payouts. In some neighborhoods, car thefts are more common than in other neighborhoods. That makes it most costly for insurance companies to insure the residents in said neighborhood. The solution is to make owning a car unnecessary! Owning a car is far more expensive than using public transportation. If states and cities make more efforts to provide a more efficient and affordable public transportation system, the need for low-income folks to own a car decreases and the cost of getting around for them also can be reduced drastically.

In recent years, consumers have paid more attention to the social integrity of larger corporations. How does news, such as insurance companies charging disadvantaged drivers more money, play a role in consumer perception?

There are a lot of unsavory behaviors by the insurance industry that were underreported in the past. So, acts of public shaming were less common, and insurance companies were getting away with a lot of bad behaviors. Hospitals also overcharge patients who are less educated! We should make a more conscious push to regulate and provide more regulatory oversight, rather than relying on social media, to ensure insurance companies and hospitals are acting more ethically. But the collective efforts of the public should not be underestimated. I think that is a great tool.

Being categorized as "disadvantaged" can spiral consumers down a vicious cycle. For instance, poor credit can lead to higher charges, which then inhibits the ability to save and leads to more debt that drives the credit score down even more. What is one thing that people can do to break free from this cycle?

This is perhaps one of the most important issues we should address as a society! Predatory lending practices such as payday loans should be made illegal or have their fees and interest rates capped. Most people utilizing these predatory products are undereducated about the true cost of these products.

I don’t know if there is anything people facing tough situations that need to use these products can do to break the cycle. The only thing that can stop the cycle is not to use those products. But they need short-term financial relief. The government should step in and provide some short-term lending facilities to people in low income brackets. This is not entirely new. The government provides low-cost loans to small businesses and low-cost loans to individuals taking out mortgages. The profits from those should be used to help people with lower income levels break the cycle of poverty.

A recent ValuePenguin survey revealed that 52% of Americans think that it is illegal for insurers to consider their credit history when setting rates for car insurance. How can consumers take better control of financial products that overwhelm or confuse them?

While most Americans would like to think using a FICO credit score to determine your auto insurance premium is illegal, this is a myth. Most states allow auto insurers to use credit scores to be a factor. The good news is that currently, if you live in California, Hawaii or Massachusetts, your credit score is not a factor. Further, Maryland, Oregon, Michigan and Utah limit the impact of FICO credit scores.

Don’t fret over your credit score. On the contrary — know it. Yearly, you can receive a free credit report from the top three nationwide credit reporting agencies. If you need to, take the important steps to improve it — pay bills on time, and reduce debt.

Shop around for car insurance. You can likely reduce what you pay by a noticeable amount by shopping for a new auto insurance policy. Find the best options for reducing costs by paying online.

Your confidence in making an auto insurance decision is important to finding the best provider. Studies suggest these ways to boost your confidence and keep your costs in line with your needs:

First, learn some key insurance terms. There are many short, informative videos you can find with an online search. Consult consumer webpages. Be up on mandatory and optional coverage lingo. Mandatory auto coverage is of two types: Bodily liability insurance covers the costs from the loss of injury or death to you and others, and property damage insurance covers the costs from an accident that may affect property. This includes the cars in the accident, or other property such as a fence or building, for example. In no-fault states, you may be required to have personal injury protection (PIP), which covers medical treatment for you and passengers from your accident, and loss of wages. Further, many states require coverage for uninsured drivers involved in the accident.

Second, shop by comparing prices for the same coverage. With online price quotes you can get an indication of expected cost. Shop around, which in today’s online world is easy. You will be surprised at the range of prices. Studies suggest that the largest insurers may not be the cheapest, and you may find the best prices from a smaller regional provider. The state where you live and your ZIP code will have an impact on the price quote. Finally, consider the quality of service provided. When you have a claim, you also don’t want to sacrifice good assistance at the expense of a cheaper policy.

Finally, confirm that your insurer (or if through a broker) is legitimate. This is through your state insurance department or at content.naic.org.

Mandatory financial products, like car insurance, allow socioeconomic status and geotargeting by ZIP code to influence the price one consumer gets compared to another. Do you believe these types of nondriving characteristics should play a role? Why or why not?

No, these nondriving characteristics are a form of discrimination and social injustice. The industry needs to change its methods of calculating premium quotes to reflect potential loss from driving only. To address concerns of racial inequity in premiums, the National Association of Insurance Commissioners, which sets guidelines for its members for state insurance regulators, is conducting a review of industry rate-setting practices. States can also encourage safe driving to reduce premiums — enforcing speed limits and other moving violations.

Other factors to reduce the premiums are to limit the practice of "price options," encourage competition and support disruption with technology. Price options practice, when used, raises premium rates for customers who don’t compare shops. Instead encourage premium policies that are related to safe driving. Finally, state government regulators need to conduct reviews and hearings regarding policy premiums related to gender, income and race to ensure no institutional biases. This would eliminate premium excess that may be charged for low-income, credit score, occupation and gender.

In recent years, consumers have paid more attention to the social integrity of larger corporations. How does news, such as insurance companies charging disadvantaged drivers more money, play a role in consumer perception?

If they knew about it, consumers would be hopping mad. I suspect few consumers are aware of these issues. They can advocate for change by choosing a company that has a commitment to addressing these issues. Insurance companies that can address social inequalities, reduce anti-competitive policy pricing and have diverse representation of people of color, gender and LGBTQ in their management will not only be viewed more favorably by consumers but also by their investors. This is an area for improvement, as investors today are looking to major insurance corporations to provide a better balance in social as well as environmental and governance factors.

Being categorized as "disadvantaged" can spiral consumers down a vicious cycle. For instance, poor credit can lead to higher charges, which then inhibits the ability to save and leads to more debt that drives the credit score down even more. What is one thing that people can do to break free from this cycle?

Some tips to break free — know and understand how much you owe. This means knowing what you are spending and how much debt you have borrowed compared with your monthly income. It will take time, just as it took time to accumulate the debt, but the energy you spend on reducing your debt will help you sleep better at night. Reach out for help. Don’t let debt rule your life. You may have borrowed against your credit card, mortgage and student loans. Know that you are not alone. Know your credit history; cut up your credit cards. There are some great online apps and resources that help you manage your spending. Also, you can seek assistance — be sure it’s from a reputable counseling service accredited by the National Foundation for Credit Counseling or the Financial Counseling Association of America. Bankruptcy is generally the worst option and will follow you for many years. Take these other mentioned steps instead. You can do it — start digging out of the debt spiral by understanding what you owe.

A recent ValuePenguin survey revealed that 52% of Americans think that it is illegal for insurers to consider their credit history when setting rates for car insurance. How can consumers take better control of financial products that overwhelm or confuse them?

While it is true that credit history is an important component and consideration when determining auto insurance rates, not all states advocate this practice. In fact, California, Hawaii and Massachusetts prohibit using credit history to set auto insurance rates.

Some of the important steps that consumers can take to judiciously ensure that they are in better control start during the process of buying a car (compare car rates because higher prices and expensive cars, cars that are likely to be stolen or cars that have higher repair costs often lead to higher insurance as well). Once the consumer has decided which car to buy, it is important to call up three to four insurance agents (captives and independent insurance agents). This step is helpful to compare insurance rates and also get an idea of how supportive the company would be in case of an accident or other such mishap. Consumers should think smart and use several strategies to get good auto insurance discounts. For example, in the case of teenage drivers, many companies offer discounts for good grades or completing driver education programs.

Even if you are not a teenage driver, there are other ways to qualify for discounts and save money on a car insurance premium. Some of these are increasing your deductible, which can result in a lower monthly payment, special discounts for serving in the military, educator discounts, reducing coverage on older cars (if the cost of the car is lower than what you are paying in insurance premiums, then you need to reduce certain components of your coverage), bundling of services (taking auto and renters insurance/homeowners insurance from the same company), getting a low annual mileage discount, loyalty discount, discount on multiple vehicles, installing a device that tracks your driving tendencies (including hard braking, etc.) and maintaining an accident-free record.

Mandatory financial products, like car insurance, allow socioeconomic status and geotargeting by ZIP code to influence the price one consumer gets compared to another. Do you believe these types of nondriving characteristics should play a role? Why or why not?

It is quite true that socioeconomic status, level of education, homeownership status, unemployment levels, credit history, etc. all determine how much the consumers would end up paying for car insurance. Therefore, a socioeconomically disadvantaged individual staying in a neighborhood with individuals that have poor credit history, that have low/no education and that are unemployed/irregularly employed will likely have to pay higher premiums.

While this is quite unfortunate, insurance companies do this to mitigate their losses and protect themselves from individuals who have a poor credit history — deemed as high-risk consumers. Such consumers can still qualify for other discounts like bundling of services, installing a device in their car, accident-free driving history, signing up for paperless billing, group discounts, etc.

In recent years, consumers have paid more attention to the social integrity of larger corporations. How does news, such as insurance companies charging disadvantaged drivers more money, play a role in consumer perception?

Corporate social responsibility (CSR), societal marketing and consumer welfare/well-being are at the forefront in today’s highly competitive market. Against the backdrop of several companies that are all competing to attract new consumers and retain old ones, the practice of insurance companies charging disadvantaged drivers from certain neighborhoods higher rates continues. While companies argue that this is to protect and safeguard their interests and to hedge their risks, research on this topic shows that consumers perceive such companies as practicing just "symbolic" CSR.

Symbolic stands for CSR that is fluff or not genuine/authentic. It is mere greenwashing. This differs from "substantive" CSR, which is genuine, authentic and through its actions epitomizes and strengthens the belief that companies genuinely care about society (after all, every citizen is a part of society, so through substantive CSR actions, the company demonstrates its concern for society). I have conducted research on these two streams of CSR, and consumers definitely perceive such actions as being "symbolic" or not authentic.

Being categorized as "disadvantaged" can spiral consumers down a vicious cycle. For instance, poor credit can lead to higher charges, which then inhibits the ability to save and leads to more debt that drives the credit score down even more. What is one thing that people can do to break free from this cycle?

It is indeed true that this is a vicious cycle and one that is unrelenting. Therefore, consumers can get caught in this cycle and can spiral downward. In such a scenario, the one thing I recommend that consumers do is become minimalistic in their needs and wants by maintaining a low balance relative to their credit limits, which can help them improve their credit scores. This will serve the dual purpose of practicing frugality to live within your means and resisting temptation to buy more products and services. Please remember — higher balances result in lower credit scores, so become minimalistic in your consumption and reduce that balance on your credit card.

A recent ValuePenguin survey revealed that 52% of Americans think that it is illegal for insurers to consider their credit history when setting rates for car insurance. How can consumers take better control of financial products that overwhelm or confuse them?

Consumers should educate themselves. There are many good and reputable online financial education sources — LendingTree is one, along with Motley Fool, WalletHub, Investopedia and others — where consumers can get unbiased information about product characteristics. I still also find it amazing how many consumers don’t bother to read the actual products’ (insurance policy, credit cardholder agreement) terms and conditions when they buy.

Mandatory financial products, like car insurance, allow socioeconomic status and geotargeting by ZIP code to influence the price one consumer gets compared to another. Do you believe these types of nondriving characteristics should play a role? Why or why not?

Using ZIP codes to identify and narrow down territory makes sense from a risk perspective. Most driving and accidents are within a few miles of the home, so the insurer’s risk in a particular policy will relate heavily to the frequency and cost severity of accidents within the ZIP code of the insured. Efficient and accurate risk rating by the insurance companies makes insurance (in the aggregate) cheaper. In the ZIP code example, though, there can be a high correlation between ZIP code and ethnicity or other prohibited rating factors — making the factor look iffy.

In recent years, consumers have paid more attention to the social integrity of larger corporations. How does news, such as insurance companies charging disadvantaged drivers more money, play a role in consumer perception?

I find it hard to believe that insurance actuaries say, "Let’s create a rating factor called 'disadvantaged' and charge them more." Rating based on relevant risk factors allows an insurer to set premiums that are high enough to earn a profit but low enough to be competitive (and auto insurance is very competitive) with other insurers. "Relevant" is defined by correlation, not necessarily direct causality. This is a big reason credit scores are used in auto rating; the relation between low credit score and causing auto claims is very strong.

Being categorized as "disadvantaged" can spiral consumers down a vicious cycle. For instance, poor credit can lead to higher charges, which then inhibits the ability to save and leads to more debt that drives the credit score down even more. What is one thing that people can do to break free from this cycle?

Spend below your means. Despite claims made by some, this is almost always possible, although it may be unpleasant.