Insurance Quotes & Advice

On Friday, a Michigan Appeals Court overturned a lower court which ruled that the state insurance commission exceeded it’s authority when it banned the use of credit scoring by insurance companies in determining premiums for auto and property insurance.  This is a controversial topic across the country, the insurance industry feels that credit scoring is a viable determinate for risk in premium pricing while consumer groups feel that it’s use unfairly discriminates against low income and minority groups.

Insurers sued in 2005 to prevent then-insurance commissioner Linda Watters from implementing rules reducing base rates and barring discounts to policyholders with good credit ratings. Barry County Circuit Judge James Fisher declared the rules illegal and unenforceable.

In 2003, Congress mandated a Federal Trade Commission study on the use of credit scoring by the insurance industry.  The study which was completed just last year concluded that credit scoring was an effective predictor of a consumer’s future claim filing probability.

Consumer groups slammed the study, stating that the use of credit scoring is no less than race profiling by proxy.  It demanded that Congress reject the study as nothing more than “biased insurance industry propaganda”.

Congress convened hearings earlier this year over the subject but has been slow to act up to this point.  Since the federal government doesn’t regulate insurance anyway, it will probably be up to each individual state regulator to make the determination on whether to ban the use of credit scoring.

Auto insurers are moving quickly to caution regulators on putting too much emphasis on high energy prices and it’s effects on driving patterns.

Based on a new paper by the Property Casualty Insurers Association of America (PCI) policymakers and regulators should be cautious in isolating one factor such as the number of miles driven and then assume auto insurance premiums should be lower.

“While there is solid evidence that the high price of gas has reduced the number of miles driven, it would be a mistake to assume that this means there will be lower insurance claims reporting and as a result, lower insurance premiums for consumers,” said Paul Magaril, regional manager and counsel for PCI.

This is a little bit of spin control by auto insurers as state insurance regulators have considerably more power these days than in years past.  You now see states like California and Florida strictly enforcing mandated rate reductions and carriers are finding it much more difficult to gain approval for rate increases.

Gasoline prices have started to fall somewhat recently, as oil has lost over $30 a barrel from it’s high in mid-July.  Still with driving down across the country, we could see increased momentum toward a usage based pricing model.

Right now most insurance carriers have esoteric pricing models with most normal people having no clue on how they arrive at their premiums.  Now unlike other factors, the amount people drive would more than likely have a direct correlation on the number of accidents that occur.

I don’t think it would be unreasonable to expect some sort of rate reduction if claims actually do decline.

Last year at around this time the price of oil was at around $60 a barrel.  While the price of gas hasn’t climbed to the same relative levels as oil, drivers are definitely starting to feel the pinch in their wallets.

The fact is though, many Americans are driving less these days and auto insurers should see a benefit from fewer accidents and thus fewer claims.  Auto insurers are no different from the rest of the insurance industry and are seeing a large drop off in investment profits  from the general decline in financial markets.

In the short term they should see a jump in underwriting income until premiums readjust themselves through competitive market forces.  Something that drivers may look forward to in the next few years is a possible industry move to a usage based premium pricing model.

The current pricing model relies on a number of variables, including gender, age, credit history, and marital status—all of which are predictive but not definitive. Usage-based insurance, on the other hand, uses driving data with which insurers can determine more accurate rates and encourage insureds to control these rates. For example, if a customer drives less, travels at reasonable speeds, brakes and accelerates gradually, and generally practices safe driving behavior, those habits can help lower his rates.

Most drivers would probably welcome this change as it would be more palatable than let’s say the use of credit scores in determining premium rates.  The big question is whether insurers will be able to obtain the needed driving data on a consistent basis.

It is doubtful if this push for this new pricing model would have come about this soon if energy prices stayed at last year’s level.  If driving remains constrained though, one can easily see at least one insurer switching to this model in order to gain market share and then drivers may start benefiting as well.