New York is the most recent state to ban using education and occupation as a determination of insurance premiums.
Though such a measure has been proposed in several states, only a few—such as Massachusetts—have legislation in place to actually prohibit the practice.
This is largely due to a disagreement between consumer advocates and those in the insurance industry regarding whether the use of non-driving factors in determining premiums is fair or discriminatory.
Actuaries disagree on the reason people in certain professions—such as dentists, accountants, and teachers—are correlated with lower claim costs. It might be that the individuals attracted to these industries are more risk-averse, or that they’re simply more likely to have the means to pay for damages themselves instead of filing a claim.
No matter the reason for the correlation, insurers advocate for the use of education and occupation when determining rates, citing that it’s fair to offer lower quotes to lower-risk pools of insureds.
On the other side, financial regulators put the burden of proof on the insurers, requiring that they demonstrate a clear relationship between an individual’s driving ability and the underwriting factors used. Otherwise, pricing could be considered discriminatory towards those with low incomes and limited education. Without this rule, insurers could also extend their considered underwriting factors to include nearly any personal factor as well.
Multiple Non-Driving Factors Still Debated
Though New York will no longer let insurers consider education and occupation, there are other non-driving factors—such as credit histories—which will still be allowed in premium determination. In New York’s case, the use of a person’s credit history was specifically allowed by a statute. However, this practice has been disallowed in three states—California, Hawaii and Massachusetts.
These three states have been the most aggressive in restricting the use of non-driving factors in rate calculations, preventing insurers from considering driver characteristics such as age, gender, homeownership, length of driving experience, and marital status.
Factors, such as age and gender, are quite closely correlated to the number of incidents for which an insurer could expect to pay a claim. Drivers between the ages of 16 and 19, for example, are three times as likely to be in a car accident than an older driver. Similarly, over the past 30 years, data has shown that over twice as many men have died in motor vehicle crashes as have women. However, there is a point of contention about the influence of a person's marital or homeowner status on their driving.
Question of the Weight of Non-Driving Factors
Whether or not non-driving factors are used in determining premiums is only part of the debate, the other being the weight of this information. Consumer advocates believe that a person’s driving record should be the primary element determining premium rates in order for them to be fair.
However, a Consumer Reports study found that this is often not the case. In the majority of states that allow a credit score to calculate rates, drivers with excellent credit scores and a DUI conviction received better auto insurance rates than those with low credit scores—even when they had no incidents on their record.
California’s regulators have approached this problem by requiring insurers to prioritize the insurer’s driving record, number of miles driven per year, and years of driving experience over any other factors—such as claims frequency or location. The insurers provide documentation demonstrating their reasoning for how rates are set, and non-driving factors are not allowed to have a greater impact than the three accepted driving factors in determining premiums.
Maxime Rieman is Product Manager at ValuePenguin. Educating and assisting shoppers about financial products has been Rieman's focus, which led her to joining ValuePenguin, a consumer research and advice company based in New York. Previously, she was product marketing director at CoverWallet and launched the personal insurance team at NerdWallet.
© 2021 Newsmax Finance. All rights reserved.