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Much like the robosigning scandal blew the lid off widespread discriminatory mortgage lending in the U.S., a new study sheds light on the chasm separating the rich from the poor in the auto insurance industry.The Consumer Federation of America-backed report, called “Lower-Income Households and the Auto Insurance Marketplace: Challenges and Opportunities,” contends that auto insurers disproportionately hit low- and middle-income consumers with high-priced policies that make it difficult for them to afford coverage at all.
“In large part because of high costs and disparate impacts, a significant minority – perhaps one-quarter to one-third – of (these households) do not carry auto insurance and are driving illegally,” the study says.
Not all cities have a well-developed public transportation infrastructure, and those whose inability to afford insurance is keeping them from buying a car could be missing out on jobs and other chances to increase their income.
Study authors Stephen Brobeck and J. Robert Hunter will bring their findings to a meeting of state insurance commissions next weekend, urging them to address coverage discrepancies. (See 5 ways to pay less for car insurance.)
Part of the solution, they suggest, is offering lower premiums to people who have a history of safe driving practices.
“In some areas, many responsible lower-income drivers are required to spend more than $1,000 a year for liability coverage that is often unfairly priced and provides no real insurance protection to them,” said Brobeck, CFA executive director.
According to the study and the Bureau of labour Statistics, low-income car owning households pay more than $700 in annual premiums and moderate-income families typically pay more than $1,000.
And sometimes they can’t even get lower rates if they try. That’s partly because, like quality mortgage lenders, there’s often little access to insurance offices in urban, low-income communities.
For example, the study cites Washington, D.C., where only three of 80 insurance offices are located in neighborhoods with the lowest incomes. On the other hand, more than half – 45 – are located in high-income areas.
“These insurers are well aware that upper-income families are much more likely to own two or three expensive cars, with comprehensive coverages, than are LMI households, who often purchase just minimum liability coverage on an old car,” the study says.
Here’s a tell-tale example the report uses to illustrate discriminatory policies:
“According to data collected by the California Department of Insurance, a single male from Compton, Calif. — who is under 30 years of age, has been licensed 6-8 years, drives 7,600-10,000 miles per year, and has had one traffic ticket and one at-fault accident — would be charged between $1,628 and $2,353 for basic liability coverage and between $5,670 and $7,500 for standard coverage including collision and comprehensive …
Astonishingly, in at least several states including Arizona, Texas, and Arkansas, and probably in more, some major insurers charge individual consumers lower premiums for standard liability coverage than for minimum liability coverage. It appears that these insurers are discriminating against purchasers of the minimum coverage, who are disproportionately LMI car owners.”
Insurers also indirectly discriminate against clients based on where they live, which they take into account along with occupation, education and credit ratings when they issue policies. (See how to get the most out of your insurance claims.)
But the CFA contends “insurers often have not adequately demonstrated to regulators that these correlations exist or that they adequately reflect risk.”