The new federal definition of auto insurance affordability is flawed and is unlikely to produce “meaningful results” in getting more drivers covered, a prominent industry voice has said.
The Federal Insurance Office announced late last week that if the average liability premium paid by consumers in minority and lower-income neighborhoods exceeds more than 2% of the median income in those areas, auto insurance has become unaffordable.
FIO, a unit of the US Treasury Department, has been developing the rule for several years. The government was tasked under the 2010 Dodd-Frank Act with monitoring the extent to which traditionally underserved communities and consumers are able to access and pay for auto insurance products.
Despite reservations on the usefulness of such a rule, several property/casualty insurance companies and trade groups collaborated with the FIO to develop the methodology, which was officially released July 13.
“This new methodology reflects important feedback FIO has received from a number of key stakeholders, and it is a meaningful step toward better understanding the affordability of auto insurance for consumers and underserved communities all across the country,” said Michael McRaith, FIO director.
While consumer protection and civil rights groups have embraced the rule, however, industry members – including a leading voice among insurance agents – remain skeptical.
“We still do not see if or how FIO will account for several other critical factors, such as the differences – most of them significant – that exist among all drivers as to their individual or collective household driving records,” said Patricia A. Borowski of the National Association of Professional Insurance Agents. “Assessing auto insurance affordability is much more complex than determining the affordability of housing costs under HUD methods.”
Borowski, national senior vice president for industry affairs with PIA, added that defining affordability by a fixed percentage of income may not “maximize the value of its results.” This is particularly true when FIO does not include non-insurance related factors, she said.
The Property Casualty Insurers Association of America echoed this last criticism. Robert Gordon, senior vice president over policy development and research, stressed that “individual finances, wealth and discretionary income may vary greatly from family to family.”
“For most consumers, the cost of buying a car and maintaining and fueling it far exceed any insurance costs, make the regulatory fixation with insurance affordability somewhat misdirected,” Gordon continued.
“In particular, rapidly escalating distracted driving, traffic congestion and alcohol and drug use have been negatively impacting auto accident frequency and loss costs, which are the primary determinants of insurance rates and affordability.”
The FIO rule comes amid rapidly increasing auto insurance rates, driven by the factors outlined by Gordon. The federal government’s Consumer Price Index (CPI) for auto insurance shows that prices have risen every single month this year.
FIO will study and report on auto insurance affordability using the new methodology each year. It has not yet articulated what it will do with its findings beyond reporting them.
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