Low-Income Drivers and the Need for Affordable Auto Insurance 1

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1 Low-Income Drivers and the Need for Affordable Auto Insurance 1 Summary of the Issue The automobile insurance Maryland law requires is often out of reach for low-income individuals. Auto insurance providers use rate factors such as one s zipcode, education level, and occupation to calculate insurance rates. These factors often drive the cost of auto insurance up to unaffordable levels. Maryland law requires a minimum of limited liability insurance to pay for damage caused by the driver. This limited liability insurance provides no coverage for any damages suffered by the driver, but even this limited insurance can be too expensive for many drivers to obtain. Maryland needs to create an inexpensive insurance plan that low-income drivers can afford and to limit the use of non-driving-related rate factors that can raise the cost of insurance for many cash-strapped drivers. The Importance of Car-Ownership for Working Families In most areas of the country, owning a car is a necessity. Automobiles are the primary mode of transportation for a majority of Americans and U.S. infrastructure has been modeled on an automobile-based system. Owning a vehicle increases access to jobs as well as a family s earning potential. A study found that 82% of loan recipients from a low-income carownership program were able to get off of welfare and other public aid with an estimated savings of $18.2 million a year for taxpayers. 2 Car ownership allows families access to better services, 1 Mark Sine conducted the original research and draft of this policy brief. Franz Schneiderman and Marceline White contributed edits and subsequent revisions to this piece. Steve Brobeck and Tom Feltner of the Consumer Federation of America provided helpful comments that strengthened the final document. 2 Bensinger, Ken, Affordable cars are key to getting off public aid, study finds, Los Angeles Times, March 14,

2 such as higher-quality medical offices and grocery stores, because they are not limited to only using services located within their communities. The benefits of car ownership are clear, but even if working families are able to afford a car, the required auto insurance can add a prohibitive extra expense. In most urban areas, annual premiums for minimum coverage are at least $600 per year and can often surpass $1,500. Maryland: The Need and Costs of Car Ownership In Maryland there is a need for affordable automobiles. Access to a functioning automobile expands access to jobs and increases the ease of caring for family members. In Baltimore, 80,000 families do not have access to a car and must rely on limited public transit options. A survey by Vehicles for Change found that workers in the Baltimore-area neighborhoods where most of its clients live can only reach 54% of the region s jobs within 90 minutes on public transit and that the low- and middle-skill jobs they can reach in 90 minutes comprise only 25% of the region s jobs. 3 These long commutes to and from work are common for low-income families, creating time-consuming burdens. Yet the high cost of auto insurance may make a car seem more like a luxury rather than a necessity for thousands of working families. A 2013 study by the Consumer Federation of America (CFA) found that the costs of limited liability insurance ranged from $1,225 a year to more than $4,180 a year for a Baltimore City driver. 4 Maryland requires all drivers to carry limited liability insurance that covers $30,000 for bodily injury per person, $60,000 for bodily injury for two or more people, and $15,000 for property damage to another driver or vehicle in an accident. Because car insurance is so expensive, many low- and moderate-income (LMI) drivers opt for this legal-minimum coverage even though this high-school-grads-blue-collar-workers.pdf 2

3 type of insurance only provides for the other party involved in an accident and does not cover damages to the actual insurance holder. 5 There are stiff penalties for driving without insurance in Maryland. These include: Loss of license plates and vehicle registration privileges. Penalty for each lapse of insurance - $150 for the first 30 days, $7 for each day thereafter. Payment of a restoration fee of up to $25 to register a vehicle. Prohibition from registering any future vehicles until all insurance violations are cleared. Prohibition from renewing a suspended registration until all insurance violations are cleared. Confiscation of license plates by an authorized tag recovery agent, once a registration suspension is in effect. Fine of up to $1,000 and/or one year imprisonment for providing false evidence of insurance. Despite these serious legal consequences, the high cost of auto insurance causes many drivers to forego insurance altogether. The Insurance Research Council estimated that 15% of Maryland drivers had no car insurance in How Insurance Rates Are Set The Maryland Insurance Administration (MIA) is the state regulatory body that oversees the operations of insurance agencies. Sellers must file their rates with the MIA before use, but approval is not required for the rates to be used. 7 The MIA allows insurance companies to use driving record, geographic area, sex, age, marital status, prior insurance coverage, annual mileage, make and model of car, occupation, education level, and credit history as rate-setting factors. Income level is barred from use as a rate factor. 5 Brobeck, S., & Hunter, J. R., Lower-income households and the auto insurance marketplace: challenges and opportunities, Consumer Federation of America, January 30, Hunter, J. R., State automobile insurance regulation: a national quality assessment and in-depth review of California s uniquely effective regulatory system, Consumer Federation of America, April,

4 Credit history may be used to establish a new premium, but it may not be used to deny auto insurance coverage or be used to increase an established premium if one s credit score worsens. 8 While many of these rate factors have little to do with a person s driving record, they can greatly affect the insurance costs a person pays. In fact, a CFA study found that in Baltimore, three of five national insurers surveyed quoted higher rates to a single receptionist with a high school education but no accidents or moving violations than to an executive with a Master s Degree who had an at-fault car accident on his record in the last three years. 9 While many (but not all) national insurers use non-driving related factors, in setting rates, a majority of Americans find this practice unfair (See Chart 1, below). Traffic Accidents Caused Moving Violations Years Licensed Age Miles Driven Location of Residence Occupation No Previous Insurance Level of Education Credit Score Gender Chart 1: Public Support (%) of Premium Rate Factors Used by Insurance Companies Source: ORCI national survey conducted for the Consumer Federation of America, June As Chart 1 indicates, more than 2/3 of respondents believe using education and occupation as risk factors is unfair

5 Although 55 percent of respondents polled believe that using the location of one s home is unfair, it remains a risk factor that insurance companies use in Maryland. 11 Geographical area greatly affects the premium rates for car insurance and often adversely affects low- and moderate-income drivers living in urban areas. Baltimore City rates exemplify the unintended consequences of using geographical location as a risk factor when setting auto insurance rates. City Drivers Pay Higher Rates Drivers in Baltimore City, where 22.4% of households live below the federal poverty line and many low- and middle-income families need affordable insurance, pay significantly higher car insurance rates than those in adjacent Baltimore County, where average family income is considerably higher Chart 2 Average Rate Quotes Baltimore City and Baltimore County Baltimore City Baltimore County 23-year-old man, good driver 23-year-old woman, good driver Source: Auto Insurance: A Comparison Guide to Rates, Maryland Insurance Administration, February This pattern can be seen across Central Maryland. The median household income of Baltimore City of $40,100 is far lower than the median income in Baltimore County ($65,411) and Prince George s County ($73,477) and less than half that of Montgomery County ($95,660) and Anne Arundel County ($85,690). 12 Yet Baltimore City drivers pay far more in car insurance than drivers in wealthier areas pay (see Chart 2, above). 11 Ibid

6 As Chart 2 illustrates, the average price quote for a 23-year-old male driver with no recent accidents or violations from five major national insurance carriers (Allstate, GEICO, Nationwide, Progressive Select, and State Farm Mutual) was almost $500 higher ($2,721) in Baltimore City than in Baltimore County ($2,231) 13. A 23-year-old woman with a good driving record would pay, on average, almost $570 more for insurance in Baltimore City ($2,963) than in Baltimore County ($2,395) The average insurance quote for a married couple renting their home, with each partner age 29, was more than $600 higher in Baltimore City ($3,463) than in Baltimore County ($2,825). MCRC s research confirms that Baltimore City drivers are, on average, quoted much higher insurance rates than those in wealthier counties. In June and July of 2013, the Maryland Consumer Rights Coalition (MCRC) looked at rates from five major insurers who operate in Maryland. MCRC used a combination of rate information from the Maryland Insurance Administration (as of Feb. 1, 2013) and conducted web-based research by pulling quotes for a typical consumer seeking limited liability insurance. MCRC focused on the rates for four typical consumers: 1) a single 30-year-old male, 2) a single 30-year-old female, 3) a married couple who owned their home with two children under the age of 12, and 4) a married couple who rented their home with two children under 12. For each of these samples, rate quotes were pulled for Anne Arundel, Montgomery, Prince George s, and Baltimore counties as well as Baltimore City (see Chart 3 below). 13 Auto Insurance: A Comparison Guide to Rates Maryland Insurance Administration, February 1,

7 Chart 3: Average Premium Quotes from the Five Largest Maryland Insurance Providers* 14 $4,000 $3,000 $2,000 $1,000 $0 Baltimore City Baltimore County Prince George's Montgomery County Anne Arundel County Single Male, Age 30 Single Female, Age 30 Married Couple, Male 35, Female 32, Homeowners, Two kids under 12 Married Couple, Male 29, Female 29, Renters (No homeowner's discount), Two kids under 12 The data demonstrates that a single 30-year-old male would pay, on average, more than $500 more to insure his car in Baltimore ($1,751) than he would pay in Montgomery County ($1,204) and almost $700 more than in Anne Arundel ($1,073). The average insurance costs for a single 30-year-old woman in Baltimore City ($1,621) is almost $300 greater than her cost would be in Baltimore County ($1,324) and more than $500 higher than she would pay in Montgomery ($1,087) or Anne Arundel ($975) counties. Car insurance would take more than $1,000 more out of the family budget each year for a married couple that rents their home in Baltimore City ($3,335) than it would in Montgomery ($2,327) or Anne Arundel ($2,072) counties. For a married couple renting their home, the price gap is slightly smaller, but that couple would still 14 *Allstate, Progressive, GEICO, State Farm, and Nationwide accessed June and July

8 pay, on average, almost $900 more for car insurance in Baltimore City than in Montgomery County and almost $1,100 more than it would pay in Anne Arundel County. As a result, auto insurance costs place a considerably larger burden on the budgets of drivers in Baltimore City than in other counties in Central Maryland. Based on the average quotes from the five largest Maryland insurers, a married couple with two children that owns their home in Baltimore City would pay 6.6% of their income for auto insurance -- or 8.3% if they rented their home (See Chart 4, below). The same couple living in Baltimore, Prince George s, Montgomery, or Anne Arundel counties would pay, on average, half -- or in some counties less than half -- as much of their income for car insurance. Chart 4: Percentage of Income 15 Required to Pay the Average Annual Premiums Quoted by the Five Largest Maryland Insurance Providers* Baltimore City Baltimore County Prince George's Montgomery County Anne Arundel County Married Couple, Male 35, Female 32, Homeowners, Two kids under 12 Married Couple, Male 29, Female 29, Renters (No homeowner's discount), Two kids under Ibid. 17 *Allstate, Progressive, GEICO, State Farm, and Nationwide 8

9 As Chart 4 shows, the difference in the bite car insurance takes out of family budgets is dramatic. The model married couple that rents pays more than three times as much of their for car insurance in Baltimore City (8.3 percent) than they would in Montgomery (2.4 percent) or Anne Arundel counties (2.4 percent in each county) and about twice as much as they would pay in Baltimore County (4.2 percent). For the married couple that owns their home, the ratio is about the same they also pay about 3.5 times as much of their income (6.6 percent) in Baltimore City as in Montgomery or Anne Arundel (1.8 percent in each county) counties and twice what they would pay in Baltimore County (3.2 percent). The high cost of insurance not only puts a big burden on family budgets but may increase the number of uninsured drivers on the road. In 2007, the National Association of Insurance Commissioners estimated that uninsured drivers cost other motorists $10.8 billion a year in uncompensated accident damages. 18 Education and Homeownership Affect Rates While it is clear that city drivers consistently pay more, on average, than other drivers pay, factors like education or homeownership may also change a driver s insurance premium. According to MCRC s research, some, but not all, insurance agencies in Maryland ask about years of education and whether or not the applicant owns their home. Our data shows that at least one major insurer would charge a city resident with a high school degree more than $300 more for limited liability insurance than it would charge the same resident if he had a college degree. Six of the nine companies we surveyed would charge a city driver who rents his or her home more than it would charge the same person if he or she was a homeowner with an average price mark-up for a renter of almost $ 185/year. Although education and homeownership may be factors, location remains a significant one. In MCRC s analysis, a city resident who is a college graduate and owns his or her home would pay,

10 on average, $1,433 for limited liability coverage while a high school graduate who owns a house in Baltimore County would expect to pay $1,033 for limited liability coverage (or $400 less). More research is needed to investigate the effects of other factors on rate quotes as well as different combinations of driver characteristics. How California Made Insurance More Affordable While many states have made efforts to cut car insurance costs, California s regulatory reforms and low-cost insurance program have been the most effective effort by far. In 1988, when California passed the referendum that helped create the reforms (Proposition 103), the state s car insurance rates were the third-highest in the nation and 36% above the national average. But between 1989 and 2010 California was the only state in the country where car insurance rates actually came down. In those years, rates in California declined by 0.3% while rates in Maryland increased 46.7% and the national average for insurance rates increased 43.3%. 19 How did California turn the tide? One major reason is that the state established a low-cost state insurance plan for qualifying lower-income drivers. Under this program, eligible low- and middle-income drivers can purchase a basic 10/20/3 ($10,000 coverage for bodily injury per person, $20,000 for bodily injury for two or more people, and $3,000 for property damage) insurance coverage through licensed insurance agents. Good drivers at least 19 years old with household incomes less than about 36,000 (for members of a two-person household) and less than $55,000 (for members of a four-person household) are eligible for the program. The plan does not raise premiums for other drivers, but has kept premiums under $350/year in every California county, including highly populated and urbanized Los Angeles County. 20 Since the program became available statewide in 2006, it has covered $8.6 million in medical claims Shultz, C., California s low cost auto insurance program: presentation to Consumer Federation of America, California Department of Insurance, April 22,

11 and $7.8 million in property claims. There are now 11,000 drivers enrolled in the program and more than 60,000 drivers have been enrolled since it began as a pilot program in California has also instituted a series of regulatory reforms that help make auto insurance rates fairer and more affordable for all drivers. State regulations require that insurers give primary consideration to driving record, years licensed, and miles driven in setting insurance rates. 21 The state has also mandated a 20% good driver discount, repealed the anti-trust exemption for California insurance companies, established an elected (rather than appointed) state insurance commissioner who is responsible to the voters, and given consumers the right to challenge improper rates and insurance practices before the state insurance department and in the courts, with state funding for consumer advocacy groups that represent consumers on regulatory and rate-making issues. 22 Current Maryland Policy Current California Policy file and use for rate factors (insurers must file prices with state prior to use, but can start charging these rates without state approval) 30/60/15 minimum required 46.7% Increase in auto insurance expenditures state insurance commissioner appointed by the governor 40th most competitive state for auto insurance* allows use of credit scoring in initial rate calculation prior approval for rate factors (regulator must agree to rate changes before their use 15/30/5 minimum required (with 10/20/3 minimum for approved lowincome insurance recipients) 0.3% Decrease in auto insurance expenditures (only state to decrease in same time period) state insurance commissioner elected 4th most competitive state for auto insurance* bans use of credit scoring 21 Hunter, J. R., State automobile insurance regulation: a national quality assessment and in-depth review of California s uniquely effective regulatory system, Consumer Federation of America, April, Ibid. 11

12 Between 1989 and 2005, California s reforms saved consumers $61.8 billion in decreased premiums. 23 While California had the third-highest insurance premiums in the nation in 1989, its premiums now rank 20th among the 50 states and are below the national average. Over that same period, Maryland has remained the ninth-most expensive state for car insurance, with rates that are substantially higher and have risen faster than the national average. As a result of its reforms, car insurance rates are falling in California while they continue to get more expensive in Maryland and across the country. 24 Policy recommendations MCRC recommends that Maryland create a low-cost, car insurance program modeled on California s highly successful program. Such a program would improve access to car insurance, reduce the strain it puts on family budgets, and enable more drivers to drive legally and without posing a threat of uncompensated damages to other drivers. Maryland should also require insurers to emphasize driving-related factors such as record on the road, years of driving experience, and miles driven in setting car insurance rates. Conclusion In 2010, lower-income U.S. households spent $30 billion on car insurance premiums. 25 Those costs put a big burden on families struggling to make ends meet and the high cost of insurance often makes it impossible for working families to afford the cars they need to get access to more lucrative job opportunities and higher-quality goods and services. 23 Ibid Brobeck, S., & Hunter, J. R., Lower-income households and the auto insurance marketplace: challenges and opportunities, Consumer Federation of America, January 30,

13 Creating a low-cost insurance option for lower-income drivers and limiting the use of rate factors that unfairly raise the rates of poorer drivers would save families millions of dollars each year and enable them to have better access to affordable and reliable transportation. About MCRC The Maryland Consumer Rights Coalition (MCRC) advances fairness and justice for Maryland consumers through research, education, and action. MCRC has more than 6,500 supporters across the state that work with us to address issues that affect low-and-moderate income families throughout the state. For more information, contact MCRC at marceline@maryland consumers.org or at