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[UPDATE] Biden Administration plans to perform analysis on the use of non-driving factors and big data in setting auto insurance rates

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In July, the Federal Insurance Office (FIO) announced plans to examine how non-driving factors were used in determining personal auto insurance rates due to rising claims about discrimination in rate-setting and underwriting. In response, the Insurance Information Institute stated that there is no credible evidence that insurers are charging more than they should. According to the Institute, rates are higher as a result of rising claims costs and argued that eliminating non-driving factors will result in even higher insurance costs for less risky consumers.

Auto insurance claims have grown in frequency as traffic has rebounded in 2021. Drivers have been more willing to get back on the road, with auto claims ticking up by 25 to 30% and speeding by 75 miles per hour or more reaching 74% so far this year.  

However, California recently revealed insurers were overcharging drivers in 2020, confirming the state commissioner’s claim back in March. According to an analysis performed by Consumer Watchdog, insurers in the state inadequately reduced rates accordingly with decreased accident claims by about $5.5 billion. 

As the insurance industry continues to figure out how best to address the COVID-19 pandemic, user-based technology and climate change within its claims handling procedures, it will be interesting to watch how rate setting will evolve in the near future.

The Federal Insurance Office (FIO) plans to examine the impact of non-driving factors such as a consumer’s credit history, homeownership status and others in determining personal auto insurance rates. Officials will also be looking into the use of big data and technology in underwriting and pricing. This new study comes a few months after President Biden criticized disparities in personal auto insurance pricing in a February 2021 Town Hall meeting. 

Intending to provide quantifiable information on auto insurance affordability, The FIO conducted a study in 2017 based on ZIP code-level data, finding that car insurance is generally unaffordable in 845 U.S. areas typically home to minorities and people with low-to-moderate incomes, affecting approximately 18.6 million individuals. In this study, “unaffordable” auto insurance costs were defined as anything more than 2% of median household income. 

In the new study, officials plan to perform a holistic analysis of the domestic personal auto insurance business. The Treasury Department will focus on the affordability of coverage and premium pricing disparities as well as structural shifts like the use of big data and the impacts from COVID-19 in the conduct of business. 

FIO will explore questions like: 

  • What role should non-driving related factors play in personal auto insurance underwriting and pricing, and how should these factors be assessed?
  • What are both the risks and rewards of using big data for consumers and insurers? 
  • How can FIO evaluate the potential long-term or permanent effects of the pandemic on the industry?
  • How has the shift in consumer preferences and impact of manufacturers entering the underwriting realm impacted the business? 
  • What are some other quantitative approaches FIO can take to effectively study auto insurance affordability?

This study was announced a week after Colorado announced that the state would limit the use of data in setting insurance rates. This new legislation not only requires insurance companies to demonstrate that its use of external data does not discriminate on the basis of certain classes, it also guarantees that citizens don’t overpay for coverage or be unfairly targeted. However, this specific bill does not prohibit the use of credit history. Other states that have made similar initiatives include: 

With the legitimacy of using non-driving factors like credit scores being questioned (again) and a deep dive pending on the use of big data in the insurance industry, is this the soft push that usage-based insurance models need to become the new norm?

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The Zebra is an independent insurance advisor and quote comparison site with headquarters in Austin, Texas. Utilizing its real-time quote comparison tool, The Zebra partners with companies such as Allstate, Liberty Mutual, and Progressive to help consumers browse pricing, coverage, and service level for both home and auto insurance policies.