Affordability of Auto Insurance Rates Hard to Pin Down
The Federal Insurance Office (FIO), part of the Treasury’s Financial Stability Oversight Council (FSOC), is asking insurance companies how it should go about defining what makes auto insurance rates affordable and monitoring its availability for low-income and minority families.
This is a complicated question that could eventually have strong implications for consumers and advocacy groups. Insurers worry it could lead to federal regulation of auto insurance rates.
Flawed Studies Try to Determine Auto Insurance Affordability
“Affordable” can be subjective term. For health insurance, the government has determined that affordability means paying no more than 9.5 percent of one’s household income for healthcare. But auto insurance is an entirely different matter. Several methods of determining affordability have been used, but they all have flaws.
The Insurance Research Counsel (IRC) is a nonprofit organization supported by insurance companies. In its November 2013 study, it determined that car insurance is becoming more affordable by comparing the ratio of average car insurance expenses to average median and low incomes.
Unfortunately, a study like this does not take into account the fact that those who cannot afford car insurance aren’t spending money on it. If low income families are spending less on auto insurance, it could be because they are not buying it.
A press release from research firm Perr&Knight’s RateWatch shows that insurance companies raised rates by 2.5 percent in 2013. It seems clear that rates cannot go up and become more affordable at the same time, unless income levels are rising as well. According to the Pew Research Center, income inequality is actually getting worse. The studies just don’t support the assertion that auto insurance rates are becoming more affordable.
A Possible Step toward Federal Regulation
According to Insurance Journal, insurance companies are approaching the FIO’s request with caution. Many worry that this is the first step toward federal regulations governing auto insurance affordability, something insurers do not want. At present, the office does not have the authority to regular auto insurance, but insurers worry that might be the FIO’s ultimate goal.
Photo credit: State Farm