Study: Low- and moderate-income Americans face sticker shock with car insurance

Nick DiUlio

The Consumer Federation of America has bad news for low- and moderate-income drivers: Shopping for car insurance is probably going to be an expensive and frustrating exercise.

According to a study released June 18, 2012, by the nonprofit consumer advocacy group, low- and moderate-income residents in 15 U.S. cities struggle to afford the minimum amount of state-mandated car insurance, which may harm their mobility and their access to jobs.

“You cannot overstate the value of an automobile to low-income families,” says Marty Schwartz, president of Vehicles for Change, a nonprofit organization that helps low-income families buy automobiles. On June 18, Schwartz joined the consumer federation's executive director, Stephen Brobeck, and insurance director, Robert Hunter, to discuss the study.

“There have been numerous studies that identify the car as being the number one poverty-fighting tool for low-income families,” Schwartz says. “We know firsthand the value of the car, and if we can bring down the cost of auto insurance, we can have a huge impact to help them get the tools they need to survive financially.”

The findings

To figure out just how much low- to-moderate income families may be paying for car insurance, the consumer group's researchers used the websites of the country’s four largest car insurers — State Farm, Allstate, Progressive and GEICO — to generate minimum liability insurance quotes for two hypothetical consumers. One was a man and one was a woman. Both had good driving records with no accidents or moving violations in the seven years the man had been driving and in the 12 years the woman had been driving.

Both hypothetical drivers also had good credit ratings, were single with one dependent, rented in moderate-income areas with a median income of about $30,000, had high school degrees and drove about 10,000 miles a year in 2002 Honda Civics. The man was a 27-year-old laborer and the woman was a 35-year-old bank teller.

The consumer group obtained car insurance quotes for these two drivers from the four major insurance companies in 15 cities: Boston; Washington, D.C.; Baltimore; Atlanta; Miami; Charleston, W.Va.; Louisville, Ky.; Chicago; Sioux Falls, S.D.; Denver; Houston; Phoenix; Las Vegas; Los Angeles; and Oakland, Calif.

The report points out that more than half of the rate quotes for these two “typical moderate-income drivers” were greater than $1,000, and nearly one-third of the quotes exceeded $1,500.

“We cannot stress enough how important it is to address this critical issue,” said Hunter, former director of the Texas Department of Insurance. “Since only state legislatures and insurance regulators can address this, they must recognize that this issue tremendously damages low- and moderate-income families.”

'Hard to afford'

According to statistics from the National Association of Insurance Commissioners, the average price for liability insurance in the United States is $474, with New Jersey having the highest state average: $750.

However, the consumer federation came up with four rate quotes at $3,000 or more, and just three quotes that fell below $500. Also, the male driver was quoted somewhat higher rates overall than the older woman, but the difference wasn't big — 57 percent of the man's quotes and 53 percent of the woman's quotes were at least $1,000 each. All quoted rates of $3,000 or more were given to the woman.

Moreover, the disparity between quotes from the four insurance companies was, at times, startling. For instance, in Charleston the man was quoted $620 from GEICO and $1,596 from Allstate. Hunter says this divide suggests a car insurance marketplace that isn't truly competitive.

“A good, competitive market has a 15 to 20 percent range in prices. We don’t have that here,” Hunter says. “And it’s hard to afford insurance at these prices. Combined with the wide variability, something is wrong here.”

Industry reaction

Alex Hageli, director of personal lines policy for the Property Casualty Insurers Association of America, a trade group whose members include car insurers, was skeptical of the conclusions that the Consumer Federation of America drew from the study. He says he thinks the study actually reflects robust competition rather than a lack of it.

“My initial reaction is that I don’t understand how they define a competitive market,” Hageli says. “I define it by price variance. When you pull up to a street corner and there are three gas stations all charging the same price, what’s the point of those three choices? That’s not a choice.”

In a statement, Robert Hartwig, president of the industry-backed Insurance Information Institute, pointed out similar implications.

“The Consumer Federation of America wants to know why the same person, with a good driving record, is receiving price quotes that vary so widely. The answer is simple. The markets for auto insurance are highly competitive," Hartwig says. "In addition, the experience of insurers in these markets will differ, leading insurers to price the risk of a prospective policyholder differently.”

Hartwig also points out that insurance claim payouts for injuries and property damage generally are higher in U.S. cities compared with suburban and rural communities -- an issue that he says the consumer group "chose not to explore or explain.”

“More importantly, increases in the cost of auto insurance nationwide remain in line with the Consumer Price Index, rising by less than 3 percent so far in 2012,” Hartwig says.

Do we have enough data?

James Whittle, assistant general counsel and chief claims counsel at the American Insurance Association, another trade group that represents car insurers, says he’s suspicious of the analysis by the consumer group, as it was limited in its scope.

“I don’t know that this study is an accurate reflection of market realities, because you’ve only got four insurance groups here and there are hundreds across the country,” Whittle says. “So what may look like an imbalanced pool of variability may, in fact, not be. What they’ve done is given us a snapshot, and I think you’d have different results if you had a larger pool of data.”

Reducing liability coverage?

In its report, the Consumer Federation of America suggests that lower-priced car insurance options be made available to low- and moderate-income drivers by lowering the minimum requirements for state-mandated liability coverage. Hageli agrees with this suggestion but says mandated car insurance should be eliminated altogether and the marketplace should drive lower rates, not legislative or regulatory actions.

Forty-nine states require drivers to carry a minimum amount of liability insurance; the lone exception is New Hampshire.

“We oppose compulsory auto insurance in general, because when you have a law requiring people to buy a product and it’s not working, legislators will try to enforce it, which leads to states figuring out who does and doesn’t have auto insurance, and those programs don’t work,” Hageli says. “Instead, they just add an additional layer of costs passed on to the consumer.”

Regardless, Brobeck, executive director of the consumer federation, says the report raises some significant questions that have yet to be answered.

“When we get a quote for a man from one insurer and then provide the very same info about him to another provider and get wildly divergent price quotes, you have to ask, 'What’s going on here?'” Brobeck says. “I think it raises questions about the accuracy of the way they’re quoting these rates.”

Free Insurance Quotes