THE TRUTH ABOUT CAR INSURANCE
Our exclusive data analysis of more than 2 billion car insurance price quotes across every U.S. ZIP code exposes what insurers don’t want you to know: That how well you drive may have little to do with how much you pay.
You might reasonably conclude from the ads that you’re in for some pretty sweet savings. But Consumer Reports compared what five national insurers would charge sample adult drivers in states where they are all market leaders. And we found that Progressive was actually the second most expensive, on average, with an annual premium that was $597 higher than the lowest, from USAA.
Say it ain’t so, Flo!
What’s the big secret?
Consumer Reports believes that knowledge about the going rate for any product or service is a fundamental consumer right. That’s why we embarked on a comprehensive project spanning two years, in which we analyzed more than 2 billion car insurance price quotes from more than 700 companies with the greatest share of customers in all 33,419 general U.S. ZIP codes.
What we found is that behind the rate quotes is a pricing process that judges you less on driving habits and increasingly on socioeconomic factors. These include your credit history, whether you use department-store or bank credit cards, and even your TV provider. Those measures are then used in confidential and often confounding scoring algorithms. And thanks to the availability of Big Data, companies have a lot more information to dig into.
You’re legally obligated to buy car insurance if you want to drive (except in New Hampshire), yet the business thrives on withholding critical information from customers. “Pricing transparency is one of the most powerful money-saving tools consumers can have when it comes to car insurance,” says Norma Garcia, senior attorney and manager of the financial services program at Consumers Union, the policy and advocacy arm of Consumer Reports, which has fought for car insurance protections since the 1980s.
Which Insurers Charge More or Less?
Complexity and lack of transparency in car insurance pricing keep consumers from knowing which car insurer charges a lot and which one charges a little. Here’s how five big national insurers stacked up for male and female single drivers in our study.
New-customer rate for eight male and female single drivers ages 25, 35, 65, and 75 with excellent credit and clean driving record in AK, AL, AR, AZ, CO, CT, DE, FL, GA, HI, KY, LA, ME, NH, NM, NV, NY, SC, TN, TX, UT, VA, and WA, the states where all five companies are market leaders.
It’s time for truth in car insurance
The industry is regulated at the state level, which is why pricing is literally all over the map. “That means bringing the fight to the state insurance regulators and lawmakers,” Garcia says. Some states tried to keep the marketplace fair by requiring insurers to file their pricing formulas with regulators, who would then ensure that prices weren’t excessive or discriminatory.
But over the past 15 years, insurers have made pricing considerably more complicated and confusing. As a result, “there is a complete lack of transparency,” says Birny Birnbaum, executive director of the Center for Economic Justice in Texas. Those new scoring models—though hidden from the public—are available to regulators on the condition they remain confidential. But because they’re so complex, “the regulators don’t have a prayer of being able to monitor them deeply,” Birnbaum says.
It’s about time we got a better deal from the car insurance industry. Our investigation illuminates some of the worst practices by demonstrating the real cost to consumers in dollars and cents. We also highlight the companies that are offering fair deals, and we help you steer clear of insurers whose numbers just don’t add up. But most important, we want you to join forces with us to demand that insurers—and the regulators charged with watching them on our behalf—adopt price-setting practices that are more meaningfully tethered to how you drive, not to who they think you are.
THE SECRET SCORE BEHIND YOUR RATES
You’ve heard of the FICO credit score? Meet the version insurers use to figure how much they can charge you for a policy—a score they have no legal obligation to show you.
Consumers are kept in the dark
Because insurance companies are under no obligation to tell you what score they have cooked up for you, you have no idea whether you have a halo over your head or a bull’s-eye on your back for a price increase.
Car insurers didn’t use credit scores until the mid 1990s. That’s when several of them, working with the company that created the FICO score, started testing the theory that the scores might help to predict claim losses. They kept what they were doing hush-hush. By 2006, almost every insurer was using credit scores to set prices. But two-thirds of consumers surveyed by the Government Accountability Office at about the same time said they had no idea that their credit could affect what they paid for insurance. Even today, insurers don’t advertise that fact. They usually won’t tell you what your score is; they don’t have to. If a sudden drop in your score causes them to raise your rates or cancel your policy, you’ll receive a so-called adverse action notice. But those notices “provide only cryptic information that’s of limited use,” says Norma Garcia, senior attorney and manager of the financial services program at Consumers Union, the advocacy arm of Consumer Reports.
California, Hawaii, and Massachusetts are the only states that prohibit insurers from using credit scores to set prices. In those states, insurers base premiums largely on a consumer’s driving record, the number of miles driven per year, and other factors. According to a 50-state study of insurance regulations by the Consumer Federation of America in 2013, California’s pricing practices, enacted as part of Proposition 103 in 1988, saved $8,625 per family during those 25 years.