Feds to adopt controversial definition of auto insurance "affordability"

The Federal Insurance Office has come up with a proposed metric for measuring the affordability of auto insurance — one that prominent industry bodies oppose.

Insurance News

By

The Federal Insurance Office is proposing an official definition for auto insurance affordability, in accordance with its charge to ensure that traditionally underserved communities have feasible access to the virtually mandatory product.

According to the FIO’s guidelines, “affordability” should be defined as a policy costing less than 2% of a household’s income. That definition will grant an “affordability” designation to the majority of Americans, who spent an average of 1.7% of their incomes on car insurance last year, according to the Bureau of Labor Statistics.

However, for the lowest 60% of earners who spent more than 2% of their incomes on coverage – and the lowest 20% who spent almost 5% – the new definition aims to provide some relief.

To test it, the office plans to apply the threshold to specific places, including urban areas and minority-heavy locales.

The proposal has its fair share of detractors, however – primarily those in the auto insurance industry. Prominent trade group Property Casualty Insurers Association of America has said that auto insurance is already affordable, even for drivers earning less than $20,000 per year.

According to an analysis the group released based on BLS and Census data, those low-income Americans spend roughly half as much on auto coverage as they do on entertainment. Furthermore, they spend nearly 60% less on insurance than on gasoline and motor oil, and 85% less on insurance than on food.

“Just because a household with an annual income of $100,000 can afford to pay, say, $1000 for an auto insurance policy does not mean that a household with an annual income of $20,000 could not afford to pay the same amount for auto insurance,” the PCIAA said.

The group also protests that auto insurers use objective criteria for determining rates and as such, have “little to no control” over final premiums.

Another industry group argues that American drivers of all income levels have spent a decreasing amount of their income on paying for auto insurance coverage. According to a report from the Insurance Research Council, low- to moderate-income drivers now spend about 2.8% of their income on coverage, down from 3.4% in the 1990s.

Established under the Dodd-Frank Act, the FIO has umbrella authority to “monitor the extent to which traditionally underserved communities and consumers, minorities and low- and moderate-income persons have access to affordable insurance products regarding all lines of insurance, except health insurance.”

Historically, the issue of auto insurance regulation has been left up to the states. In Hawaii, for example, insurers are restricted to driving history only when assessing rates. California regulators also watch closely over rate-making factors, which decreases cost for some communities.
 

Keep up with the latest news and events

Join our mailing list, it’s free!