Choice, budget ratios and ‘big data:’ FIO suggestion box on auto premium affordability gets a fill-up

The best way to judge personal auto insurance affordability is to look the premium costs as a percentage of disposable household income although this isn’t meaningful without examining whether it is even available in areas, according to a leading consumer advocate on insurance policy.

Or: A reasonable measurement of affordability is one that recognizes “relativity and consumer choice.” What is affordable to one consumer is not necessarily what another would consider affordable, and income may have no bearing on this consideration, countered a top personal lines trade association. One such consumer choice?: to even go out and purchase a vehicle, it said.

Birny Birnbaum’s consumer advocacy group, the Center for Economic Justice (CEJ) and the American Insurance Association (AIA) were among those submitting comments to the Federal Insurance Office (FIO)  Monday in response to a request from the Treasury office on how it should define auto insurance affordability and what metrics and data would best show the extent underserved communities and consumers, minorities, and low- and moderate- income (LMI) persons can actually procure affordable insurance.

Beth Sammis, FIO Deputy Director for Consumer Affairs, wrote in a Treasury blog in mid-April that the FIO exercise is necessary because it is hard to know if personal auto is becoming more or less affordable as insurers change how policies are priced with new risk classifications.

FIO remains very interested in the increased use and penetration of ever more precise and pervasive use of data mining to create risk categories and pricing and who and how  it might harm consumers.

After all, FIO stated in its  late 2013 Modernization Report that states should develop standards for the appropriate use of data for the pricing of personal lines insurance. “

That’s because, as FIO has noted,  there is a public policy issue at stake: Owning an automobile is likely associated with a higher probability of employment and other factors associated with economic well-being, Sammis wrote in her blog piece, which was echoed in the FIO call for comments.

With the exception of New Hampshire, all states require a consumer who owns and drives a car to maintain liability insurance.  From 2002 to 2009, the percentage of uninsured motorists nationwide hovered around 14 percent, according to FIO.

The AIA repeatedly pointed to the element of choice taken by the consumer and noted that the cost of insurance is but one cost associated with ownership of a vehicle — but that it is  the only cost subject to a “long-standing and comprehensive system” of state rate regulation and price controls.

CEJ took on insurers increased  use of so-called :big data and data mining for pricing in its comments,  but interestingly, prefaced its position  by calling for FIO to “take significant action to fulfill its Congressional mandate and monitor the availability and affordability of personal auto insurance.”

The Dodd-Frank Act of 2010  provides FIO with authority to monitor exactly this, and FIO reached out for comments April 10 some months  after the Availability and Affordability Subcommittee of the FIO’s Federal Advisory Committee on Insurance (FACI) took on the issue, proposing in part that affordability means that the cost of personal auto insurance is a “reasonable percentage” of a consumer’s income.

FIO noted that one approach may be to declare personal auto insurance as affordable if premium payments don’t prohibit people from purchasing other required household  necessities. Or, perhaps auto insurance may be interpreted as affordable if it is “actually purchased,” FIO wrote.

FIO is also looking at rounding up other  data sources to monitor affordability and availability.

Birnbaum, who serves on the FACI, favors the FIO suggestion of how the cost of auto insurance plays out among other household  costs. “We suggest that the notice’s example is a useful one – does not preclude a person or family from the purchase of other necessities,” CEJ’s Birnbaum stated in his June 9 comment letter.

With such a definition, the metric will vary by income levels – from a very small percentage at very low incomes to somewhat higher at low incomes, CEJ noted.

However, take a good look at availability, too, Birnbaum says.

While insurers licensed to write in a specific state may sell insurance anywhere in the state, the fact is that many insurers focus on non-LMI markets, while so-called “non-standard” insurers focus on LMI markets, according to the Texas economist, who  has  performed availability analyses of personal auto insurance for the Texas Office of Public Insurance Counsel and the Texas Department of Insurance who developed a data collection program for monitoring market performance of insurers in Texas auto insurance markets.

While some risk classification is essential to avoid adverse selection and to provide economic incentives for less risky behavior, states have allowed pricing practices that disfavor LMI consumers, Birnbaum charged.

For example, most states allow insurers to use small geographic rating territories for uninsured motorists with the result that consumers living in LMI communities are forced to pay more for  coverage simply because more of the neighbors cannot afford insurance than consumers in non-LMI communities, CEJ charged.

States have allowed ultra-refined, very small geographic rating territories which reflect and perpetuate historic housing discrimination, according to Birnbaum’s CEJ.

FIO stated that while data on average personal auto insurance premium by coverage is collected by the National Association of Insurance Commissioners (NAIC), other data sources will likely be needed.

Over the past year, the NAIC has worked to compile a report about the availability and affordability of auto insurance (“Compendium of Reports Related to the Pricing of Personal Automobile Insurance”) that will be considered by the full NAIC membership later this summer.

The AIA said that FIO need only look at existing data from a number of sources and noted that according to NAIC data, the average expenditure for auto insurance nationwide was well below the rate of inflation in the last decade while  family health insurance coverage rose on all counts.

The AIA also pointed to the Automobile Insurance Plan Service Office (AIPSO) as a source for data  on changes to the size of residual markets over time, as well as rates charged by residual market funds as compared with average rate levels in the voluntary market.

“AIA feels this data will demonstrate that residual markets have shrunk over time due, in part, to the increasing ability and willingness of the private market to competitively price a broader range of risk and offer affordable coverage to a wider segment of the population,” stated AIA Senior Counsel & Director of Compliance, Lisa Brown.

The NAIC couched its response in caution and  pushed the discussion outside the sphere of insurance regulatory policy.

“Our work has shown that concepts of affordability and availability are somewhat subjective and vary depending on a number of factors like financial resources, historical norms and experience, supply and demand, and expectations for the scope of coverage, among others,” the NAIC leadership stated.

There are important public policy considerations that impact whether insurance premiums are purely “actuarially justified” ( versus premiums that include adjustments for “social equity” and flatten out pricing such that higher risk drivers pay less and lower risk drivers pay more, the NAIC told FIO.

” Understanding and improving availability and affordability, particularly for property/casualty products like auto insurance, may require holistic solutions that extend beyond insurance and insurance regulation,” concluded the state regulatory leadership led by Adam Hamm of North Dakota.

More industry and some regulatory responses, which were due  to FIO June 9th, are expected to become public shortly and may be added here later as they become available.



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