Ending Insurance Discrimination

“There are two things you don’t want to see being made - sausage and legislation.” - Otto von Bismarck

Perhaps we should add the determination of auto insurance rates to this list when one considers all of the discriminatory ways this is done.

A Pittsburgh Post-Gazette article Bill would eliminate education as factor in insurance rates is about the outrage that a Pennsylvania state legislator has expressed over car insurance rates in his state being determined by the education level of the driver being insured.

Under one carrier's rates, a 37-year-old Pennsylvanian with a clean driving record and a Ph.D. would pay $546 a year to insure a 10-year-old sedan. If he were a high-school dropout instead of a doctor of philosophy, the rate would be $870.

As the legislator pointed out, “Why should (those who didn’t attend college) be discriminated against and penalized on their insurance rate because their family couldn't afford college?"

But there are many other ways that discrimination takes place as this article Are Car Insurance Rates Determined Unfairly? points out.

There are many arguments that can be made for the case that car insurance rates are discriminatory. For one, they discriminate based on age - the oldest and the youngest pay more, even if they are good drivers. For another thing, they discriminate on the basis of gender, with women paying less for insurance than men. They even discriminate against unmarried people, and since certain groups are not allowed to marry, this amounts to discrimination against them as well.

Insurance companies say that certain groups have more claims and that they need to adjust their premiums to reflect this additional risk. This argument makes sense for certain kinds of risk. For example, if a car model is more expensive to replace or repair and/or has a history of higher than average theft, it is only fair that the insurance company charges higher premiums for the additional risk it is assuming.

In addition, charging more for those who have already had more at-fault accidents is certainly fair again because of the additional risk to insure these people. But charging some people more because they are part of a group that they expect to have more accidents gets onto shaky ethical ground. In essence, it allows insurance companies to double dip — by both allowing them to raise rates after an at-fault accident along with also allowing them to charge more for some others even before they have even had their first accident.

Or put another way, shouldn’t a person pay a rate based on their own driving record? Shouldn’t all good drivers get the same best rate as long as they continue to be good drivers?

In addition to the above ways that insurance companies discriminate in setting rates, many are unaware of how credit scores affect insurance rates.

Your credit score can have a profound effect on the amount you have to pay not only for auto insurance, but for homeowners insurance also -- and perhaps on health and life insurance in the not-too-distant future.

The Insurance Information Institute, a trade association for insurers, says drivers at the bottom of the credit heap file 40 percent more claims than drivers at the top of the pile.

Not everyone agrees.

The Boston Globe reports Massachusetts' Attorney General Thomas F. Reilly and Boston's Mayor Thomas M. Menino have questioned whether a customer's credit history is really a good indicator of his propensity to file claims. They also charged that the use of credit information discriminates against minorities and low-income people and unfairly penalizes those who have gone through some life crisis like a job layoff or divorce.

Insurance regulators should ideally balance the interests of the insurance companies and the consumers they serve. This is especially important with a product like auto insurance which all drivers must purchase by law. But consumers are at a terrible disadvantage when going up against insurance companies that are skilled at working the system to their advantage. Any pretense for increasing premiums (or denying benefits) means more profits for them.

The situation with health insurance is a more extreme example of this.

The present health insurance system in the US allows companies to discriminate against policyholders they do not want to insure due to ‘preexisting conditions’ by either not offering policies or making them prohibitively expensive which accomplishes the same thing. This is a logical way to do things for a company trying to maximize profits but leaves those with health problems to fend for themselves and risk further health problems along with bankruptcy. Advocates for single payer health insurance in the US want to take the profit motive out of health insurance and replace the health insurance companies with a government run health insurance system like Medicare presently used for all of its over-65 population. But instead, President-elect Obama has proposed a system where the health insurance companies will still offer policies in return for giving up their right to reject coverage for those same ‘preexisting conditions’. Will the health insurance industry agree to this? Stay tuned.

The problem of insurance discrimination is really part of a larger problem caused by the anti-regulation mentality that Wall Street took advantage of (including the recent bailout financing the lavish executive lifestyles of insurance giant AIG).

In addition to discrimination, the insurance industry has exhibited some really sleazy behavior when they felt they could get away with it — and for the most part they have! For example, the Michael Moore film Sicko documented extensive wrongdoing by health insurance companies that in some instances resulted in needless deaths of patients while at the same time amassing record profits.

And then there were the many Hurricane Katrina victims who suffered through the loss of their homes and businesses only to see their insurance companies renege on their coverage.

Insurance companies may have paid out $11 billion to Louisianians in the two years since Hurricane Katrina, but they have also become a new villain in the tales people tell about the slow recovery here. Every neighborhood is full of horror stories about insurance companies that reneged on their promises, offered only pennies on the dollar in settlements, dribbled out payments, low-balled the costs of repairs, dropped long-time customers and sharply increased the price of coverage.

So while we have learned our lesson on making sure we will have enough regulation in the financial markets, we need to also make sure that we make the same needed regulatory reforms in the insurance industry. Indeed we have already made some progress when in September, Congress passed legislation to end insurance discrimination against mental health and substance abuse patients who usually had less benefits than those with physical health claims even from the same provider. This is a good start but we need to do more if we are going to be really serious about looking out for the welfare of those on Main Street instead of just Wall Street.