As many as one-quarter to one-third of low- to moderate-income drivers do not carry auto insurance, largely because of high costs of coverage and an unfair system, according to a new study by the Consumer Federation of America.
The report recommends state insurance commissioners take steps to reduce costs for responsible, low-income drivers, which would help enable them to own cars and gain employment.
Among the study's findings:
- Car insurance rates are especially high in lower-income urban communities.
- Insurance companies locate few of their offices in low-income neighborhoods. Of 80 insurance offices in the District of Columbia, three are located in two wards with the lowest incomes, and 45 are located in the two wards with the highest incomes.
- Low- and moderate-income customers pay higher car insurance rates for factors out of their control, such as occupation, education, credit rating and where they live. Insurance companies base rates in part on these factors because they reflect risk. But some of the factors are a result of income. State laws do not allow insurance companies to base ratings on customers' incomes.
- Low- and moderate-income customers pay high premiums for comprehensive and collision coverage required by lenders. Part of the high cost is due to the commissions insurance companies pay to lenders.
The Insurance Information Institute (III) disputed the report's findings, pointing to a Jan. 17 National Association of Insurance Commissioners report that showed car insurance expenditures had dropped for typical auto insurance customers every year from 2005 to 2009. The percentage of median family income spent on auto insurance also has dropped in recent years, according to an index developed by Risk Information Inc.
The Consumer Federation of America study recommends state insurance commissioners work to lower state minimum liability coverage requirements, research disparate treatment of customers based on income and create low-income car insurance purchase programs.
But III says state insurance commissioners already review and approve rating criteria auto insurance companies can use. It also notes that state-sponsored low-income car insurance programs, such as California's Low Cost Automobile Insurance Program, do not draw significant numbers of customers. III contends the best way to lower rates is to address underlying costs of car repair and medical treatment, as well as fraud.
"Changing rating factors that have been shown to accurately project future losses will only distort prices and result in good drivers subsidizing riskier ones," Robert Hartwig, economist and institute president, said in a press statement.