Insurance companies tend to apply greater prices on the car insurance policies for low-income people, a study published by the Consumer Federation of America shows.
“Lower-Income Households and the Auto Insurance Marketplace: Challenges and Opportunities” is the report wrote by Stephen Brobeck and J. Robert Hunter. They reviewed the literature from academics and regulators and added new findings from their research.
The cost of car insurance can be a heavier burden than the cost of the car, in certain cases. And this leads to economic implications, the authors say.
“There is much academic research that clearly shows that if you have ready access to a car, it dramatically improves your economic opportunities. The release of the report is just the beginning of our initiative to try to inform the country, particularly state regulators, who can do a great deal to mitigate the problems,” said Stephen Brobeck, executive director at the Consumer Federation of America.
The legislation prevents insurance companies to establish premiums on income base, but they have the possibility to take in consideration the driver’s education, occupation, home address, and credit rating.
According to the Consumer Federation of America, these data can replace the information on income and until now there were no studies on what impact has this combination of factors on the poor persons.
“We think education, occupation and credit scores are surrogates for income. Occupations that have no driving risk affiliated with them but do have lower incomes tend to pay more, so it raises serious questions,” said J. Robert Hunter, director of insurance at the group.
“In some areas, many responsible lower-income drivers are required to spend more than $1,000 a year for liability coverage that is often unfairly priced and provides no real insurance protection to them,” said Stephen Brobeck.
Around 14% of the car owners drive without insurance, according to an estimation made by the Insurance Research Council in 2007. In people with low or moderate income the rate is probably double, said J. Robert Hunter.
Car insurance cost represents a big part taken from the income for low-income workers, who regularly need to drive to work. As a consequence around 20% of car owners who earn $37,000 or less annually do not have car insurance, the authors say.
Generally homeowners pay less than persons who do not own their homes. People with low education, with less skilled occupations also have to pay more. For them premiums are 40% higher, according to a 2006 study cited in the report. The prices also rise when it comes to drivers with a flawed or a thin credit history, or to persons who had a coverage with lower limits on bodily injury.
The price of the insurance policy generally reflects the price of the car, but even a very used car, a jalopy can cost $700 to $1,000 per year, says the report. The median national cost is $835, but it weighs a lot for poor people.
The study also found that some insurers were charging more for policies with less coverage, which, they said, is likely to disproportionately affect lower-income households since they may be more likely to buy those policies.
“Some companies charge more for the basic limits for the state than they would for higher limits for the exact same driver. It’s like going into a store and saying, ‘I want a box of cereal,’ and the big box is much cheaper than the little box,” J. Robert Hunter said.
This kind of tendency also hurts poor people because they are more likely to buy the minimum coverage policies.
With only one exception, New Hampshire, car insurance is mandatory across the United States.
“The big problem is that mandatory coverage is so expensive, often costing over $1,000 in urban areas that it prevents them from buying a car,” said Stephen Brobeck.
The states have to ameliorate the access to low-cost car insurance, since California is the only state with a strong low-rate coverage program, the report says.
“The states are cracking down on the uninsured. If they are going to do that, they have a responsibility to ensure that lower income people can afford to drive,” said Stephen Brobeck.
The number of miles driven is considered a factor that diminishes the risk of accidents and it may reduce premiums, but it has an improper importance in the insurance industry’s classification system, says the report.
“Poor people, we know from the data, they spend a lot less on gas, which means they are driving less. So if insurers more fully reflected miles driven in pricing, it would lower the rate for poorer people,” said J. Robert Hunter.
In California, drivers who own a vehicle worth less than $20,000 and who have incomes of less than $27,000 to $55,000 (depending on family size) and who have driven at least three years with a clean record can qualify for minimal liability coverage at relatively low rates.
The annual premium for drivers in the program was $358, the report says. This also happens to be the highest premium the program charges in all of California. The average annual premium in Los Angeles was $802.
Also lowering the minimum amount of liability insurance that lower-income households are required to purchase was proposed by the authors.
J. Robert Hunter suggested to the Federal Insurance Office to collect more data regarding the car insurance cost for low-income persons.