DUCK KEY, FL — The National Conference of Insurance Legislators will schedule a special session at its spring meeting in Washington D.C., to look at whether greater legislative clarity is needed on the extent to which states can and should permit the use of education and occupational factors in insurance underwriting.
Popularized by Geico and beginning to be adopted by other automobile insurers, the use of educational and occupational rating classifications is beginning to stir some of the same controversial waters that have engulfed the use of personal credit information in personal lines underwriting and rate-setting.
"It seems to me, going down this road, we’re going to have the best rates for insurance executives with master’s degrees, perfect credit scores and who drive one mile to work. It’s really narrowing things down," said state Sen. David E. Bates, R-R.I., who proposed the topic as a special agenda item.
State regulators have been tracking the practice, according to Eric Nordman, director of research for the National Association of Insurance Commissioners. However, while statutory restrictions that demand rates not be discriminatory are widespread and long-standing, commissioners have had little legislative guidance on whether discounts or surcharges granted on the basis of an applicant’s education or occupation should be prohibited.
"While they’re doing their due diligence, there’s very little in state laws that could guide them along those lines. In fact, there are very few state laws that would prohibit the use of either occupation or education as rating factors," Nordman said.
An April 2007 report by the Florida Office of Insurance Regulation deemed insurers’ use of education and occupation in the underwriting process for private passenger automobile insurance to be "highly correlated to race and income level," though it did not find any companies actually broke the law.
Eric Goldberg, of the American Insurance Association, noted that Geico re-entered the New Jersey auto insurance market in 2004 and within two years, while using both education and occupation as underwriting variables, had grown to become the state’s third-largest writer. A review of the underwriting variables by the New Jersey Department of Banking and Insurance found that they were actuarially based and did not appear to violate the state code, Goldberg said.
"Our understanding is that, while insurers do use these factors, they are not quite as prevalent as credit-based insurance scoring," he added.
Nonetheless, their use is drawing the ire of consumer advocates, and even some in the industry. In May, Eric Poe, chief operating officer for Princeton, N.J.-based Citizens United Reciprocal Exchange, told the U.S. House Financial Services Subcommittee on Oversight and Investigations that Congress should consider banning not only the use of credit information in its rate-setting and underwriting models, but also to investigate such practices as income- and education-based discounts (BestWire, May 20, 2008).
"We decided decades ago that basing insurance rates on race, even though that’s actuarially sound, was not good public policy, and I think we need to go the same way on education and income," said consumer advocate Carmen Balber, of the California-based group Consumer Watchdog. "We are deciding, by allowing insurance companies to base rates on either of those two factors, that it’s OK to charge people who make less money and minorities higher insurance rates."
Contact the author R.J. Lehmann, Washington bureau manager at: [email protected].