Dec 2014

How auto insurers can help solve the inequality crisis

auto insurance underwritingWe’ve all heard of the cycle of poverty – a situation in which low income families become entangled in a continuous poverty cycle because they are less able to access education and other resources. However, what you may not have thought of is how auto insurance underwriting practices may contribute to these socio-economic inequities.

Imagine this scenario

Anna is a low-income single mother who cannot afford good health insurance. Her child becomes chronically ill. The medical bills pile up, and because she has missed work to care for her child, she is unable to pay some of her bills on time. Anna’s already fragile credit score takes a serious hit. Then, when her auto insurance renews, she receives more bad news. Because her credit score is low, her insurance rates significantly increased. Now the cycle continues. While struggling to afford auto insurance, other bills slide and Anna’s credit score continues its downward spiral.

A good idea with an unintended consequence

Two decades ago, when auto insurers began using credit scores to establish insurance rates, this was surely not the scenario executives envisioned. They simply knew that for whatever reason, there was a correlation between credit scores and auto accidents. And, they knew that by leveraging credit score intelligence, they could likely drive down auto insurance loss ratios.

There’s an unintended side effect though: It’s harder (a lot harder) for lower-income people to maintain good credit as you can imagine based on our earlier scenario. Even if low income people are above-average drivers, their below-average credit scores could saddle them with heavier premiums.

Now that we know better, we can do better

While credit score intelligence improved auto insurance profitability, it’s by no means the ultimate solution. While there is some correlation between credit scores and driving behaviors, there is an absolute relationship between real driving data and a driver’s propensity for accidents.

Now that auto insurers have the means of going beyond credit score rating, they should. It’s the fairest approach, particularly for those concerned about leveling the auto insurance playing field for low income Americans.

What if insurance companies were willing to use UBI data as an alternative to traditional credit-based underwriting? What if low income Americans were able to request that their insurers use real driving data to establish their rates? There would be a real incentive to drive safely – a key benefit for everyone out on the road.

Economics and insurance: Why it matters

When you think about the socioeconomic correlation between income and car insurance, it becomes clear that lower-income people are disadvantaged. Credit-based premium rating is just one example of how people who have less to spend ironically end up paying more. As an article in St. Louis Post Dispatch reports:

“High school dropouts may pay more than people with master’s degrees – even when the well-educated have worse driving records. Janitors may pay more than business executives. People who rent may pay more than home owners. People who live in poor, crime-ridden parts of town will pay much more than others.”

Usage based insurance has the potential to help sidestep the murkiness of income inequality by setting insurance rates based on how people actually drive, rather than by their bill-paying ability.

After all, everyone deserves a shot at affordable auto insurance. And, everyone could use an incentive to drive safer.  Perhaps usage based insurance can help us achieve both those goals. Click here to learn how usage based insurance works for auto insurers.