I have a lot of experience with the inner workings of the auto insurance industry and thought I'd share some information with the DKos community. First, a disclaimer: I would never operate a motor vehicle without liability insurance. That would risk the welfare of my family should I cause an accident and lose our house in a lawsuit. That being said, I am completely against state laws that mandate auto insurance unless the premiums are tightly controlled and regulated.
Continued...
Most people that I talk to have no idea how an auto insurance company makes money. They think it is simply about setting premiums at a rate that will be more than the estimated losses, and hopefully, profit from this gamble. That is true to some extent, but there is much more. Think about this: Why would they gamble if they could guarantee profits by other means. Here are the "real" methods they use to make money, and the reasons why they are discriminatory.
Collect Premiums as Early as Possible
Insurance companies don't just put the money they collect from customer payments into a bank account. They invest that money. So when they collect the premium for an entire policy term up front, they maximize their profits. Most companies actually offer discounts when more money is paid at the beginning of the policy term. For example, let's say that two men that are the same age, live in the same town, and have clean driving records apply for insurance with the same insurer. Their estimated premium for liability insurance would be the same; let's say $1,000 to make it simple. The auto insurance company might offer the following payment options:
==> $200/down and 8 payments of $100 (Total $1,000)
==> $400/down and 5 payments of $100 (Total $900)
==> Paid in full (Total $800)
So you see, people who can afford to pay more up front, pay less overall. I would not have a problem with this business model except for the fact that liability insurance is mandated by most states. And even though one man poses the same risk as another, he will likely pay more if he has less money. It's state-sanctioned screwing of the poor and it is wrong.
Offer Better Rates to "Select" Groups
I mentioned earlier that setting premiums at the right level was a part of profitiability for auto insurers. For instance, if you are younger, you pay more in premiums. If you have a bad driving record, you pay more. If you are a man, you pay more. If you are not married, you pay more. If you live in the wrong neighborhood, you pay more. If you have a bad credit rating, you pay more. If you don't own a home, you pay more... etc.
Does anyone see an alarming trend here? I know what some people are thinking: Statistics show that certain people are more likely to cause an accident than others... yaddy yaddy yadda. But again I must remind you; liability coverage is a requirement for driving in almost every state in the nation. Let me give you a few examples showing why it's wrong.
Example 1: A same-sex couple that has been together for 20 years cannot get the marriage discount.
Example 2: A man living in a poor, mostly minority, urban neighborhood pays more than a man living in the suburbs who commutes to said neighborhood every day for work.
Example 3: Two women with the same driving record live next door to each other. One rents, the other owns her home. The homeowner pays 10% less than the renter.
Example 4: A man loses his job, has trouble paying his bills and gets a few negative marks on his credit rating. Two years later he is gainfully employed and up to date on his bills. He will be penalized in his insurance preiums.
It's state-sanctioned discrimination and it is wrong.
Shut Out Unwanted Groups
In some cases, auto insurance companies do not want to provide coverage to certain statistical groups. The most common unwanted group is people living in densely populated regions. And how, you ask, do they shut these groups out? They set the premiums so high that the people living there cannot afford to pay. The insurance companies basically price themselves out of the market. State laws do not allow auto insurers to pick and choose where they can offer insurance. It's all or nothing. So they use this method to get around state regulations. Let me give you a real-life example from my own experience.
I lived in Providence, RI at the turn of century. It is a small, but densely populated city with heavy traffic and an old infrastructure. The roads are very narrow in places and cars are always parked on the side of the roads. With a clean driving record and no losses, I paid almost $2,500/year for liability coverage. When I moved out of the city a few years ago, it dropped to $1,000/year with the same company. Last year, I moved to a rural area and the rate dropped to $300/year.
Being an auto insurance insider, I know that the huge disparity in the rates does not reflect the difference in the risks. Loss ratios are not 2 1/2 times higher in the city, and certainly not 8 times higher than the rural area in which I now live. Remember people who live outside the city commute to work in the city.
Reinsurance
This is a big part of insurance company profitability. Insurers sell polcies in groups to another, often larger company. They are basically deciding that they do not want the risk. There is nothing wrong with this practice, but I felt the need to add it for thoroughness on this topic.
There are many other examples of state-sanctioned auto insurance discrimination too numerous to go into in a single diary. The bottom line is that the states need to tightly regulate insurance rates if they are to force people to get liability coverage. And the companies who provide auto insurance should not be allowed to discriminate based on gender, age, sexual orientation, marital status, or any number of other factors. It violates equal protection laws.