Are Low Income Consumers Charged More For The Same Insurance?

A report released earlier this year, by the Consumer Federation of America (CFA) claims that is the case. The group calls into question the rate setting practices of auto insurance companies. CFA says that the methods used to determine car insurance premiums are putting low- and middle-class wage earners at a disadvantage. The group charges that this segment of drivers is frequently given much higher auto insurance rates than high income drivers.

While it is illegal to base insurance premiums on race or income, CFA claims that other factors used in rate calculations are simply a backdoor method for insurance companies to discriminate based on these factors.

While actual rate calculation specifics are not published, the industry is well-known for using factors such as age, education, credit history and city or town of residence when deciding how much to charge for auto insurance.

Insurance Companies Respond To CFA Claims of Over-Charging the Poor

“In some areas, many responsible lower-income drivers are required to spend more than $1000 a year for liability coverage that is often unfairly priced and provides no real insurance protection to them,” said CFA Executive Director Stephen Brobeck.

Insurance companies answer these claims by stating that rates are set based on risk alone. For example, inner city neighborhoods are generally more congested than other places and therefore residents are more likely to have an accident and file a claim.

Robert Hartwig, chief economist and president of the Insurance Information Institute says this is because there is more risk, not because the people living there are poorer.

Another study performed by the Brookings Institute had similar results. In its review of Geico, Progressive and Allstate, the institute found major price differences, up to 94%. These differences were found on policies issued in the same metropolitan areas but to low income drivers versus higher income drivers.

CFA does acknowledge that low cost car insurance is more readily available than in the past but notes that low-to-moderate income drivers can spend from $700 to $1000 on yearly premiums. Sometimes this is more than they spend to finance the car they are insuring. With cars being a necessity for most families, in order to work or grocery shop, the problem is pressing for this group of drivers.

Increased competition has driven down consumer prices in recent years and the CFA hopes that awareness of insurance company pricing practices will keep the trend going in that direction.