California to Toughen Rules on Group Discounts for Car Insurance

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Investigation found some programs discriminated against low-income people


December 23, 2019

California regulators are planning stiffer rules on car insurance sold through occupational, educational and other so-called affinity groups, contending some programs discriminate against low-income people.

The state’s insurance department on Monday said it has launched an effort to toughen oversight of group-discount arrangements.

The move follows an investigation that found the most-frequent beneficiaries of these arrangements were Californians in ZIP codes with higher average incomes, higher levels of education and a greater percentage of non-Hispanic white residents, insurance department officials said.

Out of millions of California vehicle owners in affinity groups, the investigation found the most prevalent type was occupational. 

State Insurance Commissioner Ricardo Lara’s concern is that some insurers are essentially lumping people together by job category in what the state dubs “fictitious” groups, in contrast to bona fide membership groups such as labor unions, the officials said.

About 60% of the state’s private-passenger automobile insurers offer group-discount programs, covering lawyers, teachers, scientists, engineers, public-safety workers and the military among other types of work, according to a presentation prepared by the state.

While the potential new regulations would apply just in California, the move adds fuel to a national debate among regulators, insurers and consumer advocates about what factors in determining how much consumers pay for car insurance should be prohibited even if they are effective at identifying risks. In 2017, New York’s Department of Financial Services banned use of education and occupation as factors in setting auto-insurance premiums.

Consumer advocates representing low-income people maintain that the use of education and occupation unfairly penalizes people who can least afford insurance even as all vehicle owners are required by law to buy liability coverage.

The investigation found that differences in rates based on job type alone could vary from 1.5% to 25%.

“Many insurance companies were effectively using group discounts to cherry-pick members, giving some higher-income occupations a fast pass while people of color and lower income motorists were left in the slow lane,” Mr. Lara said in an emailed statement.

Most states allow insurers to use education and occupation as pricing factors alongside age, gender, driving history, vehicle type and estimated miles to be driven, and many allow use of credit scores.

The insurance industry maintains that education and occupation are actuarially justified, help predict the likelihood of an insurance loss and allow for more accurate underwriting and pricing. Use of occupation goes back nearly 100 years, when some early car insurers formed to sell specifically to federal workers, military officers and teachers.

While the connection to driving behavior isn’t clear-cut, some actuaries speculate that people with a cautious nature are attracted to certain jobs, and those traits show up in driving. Others think highly paid people may absorb the cost of some wrecks themselves, and thus don’t file claims as frequently as poorer people.

Mr. Lara’s concern is that group discount programs can be used as a proxy for discrimination on the basis of education, income level or race.

Among potential changes in California, insurers would have to verify that an insurer-selected group is a bona fide group. Group discounts can continue “but only if those groups are justified and non-discriminatory” Mr. Lara said.

—Nicole Friedman contributed to this article.

Write to Leslie Scism at [email protected]

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