Giving Americans Cheap Car Insurance Without Bankrupting Insurance Companies Is Easier Than You Thin

Looking for cheap car insurance? You're not alone, and you haven't been for a long time.

On Tuesday, a report by the Consumer Federation of America showed that average auto insurance premiums have jumped 13.7% in Hawaii (the smallest increase) to 108% in Nebraska (the largest increase) over the past 25 years, despite gains in safety by car manufacturers, efforts by municipalities to build safer road infrastructures, and consumer emphasis on safe driving practices. This increase is almost across the board, occurring in 49 out of 50 states. The only state that has seen a decline in auto insurance premiums is California at -0.3%.

I spent the summer in L.A. and experienced the infamous bumper-to-bumper traffic up and down the western coast of the state. Everyone in California drives, so why are auto insurance premiums dropping there of all places? Isn't risk higher with more vehicles on the road and shouldn't that drive up premiums?

The answers to these questions lie deep within the algorithm that auto insurance companies use to set rates. All is not fair in the world of auto insurance, except in California where consumers have saved a whopping $100 billion plus in insurance premiums as a result of pro-consumer insurance regulations instituted in 1989.

It's expensive to be poor

While most consumers know that FICO scores have a direct effect on our ability to get financing for various types of lending, and the interest rates associated with those loans, most consumers don't realize that FICO scores have a strong influence on other areas of our financial life. For example, FICO scores affect all types of insurance premiums in most states. The great exception to that rule is auto insurance in California because California outlawed discriminatory practices against low- and middle-income consumers, as well as minority consumers.

Rules need regulation

Rules are only as good as the regulations that surround and support them. Our lives are filled with a wide variety of legal protections against discrimination in employment, lending, housing, elections, and college admissions to name just a few. However, society needs a fair and just system that allows consumers to register complaints and open inquiries into suspicious practices. Governments must commit to thoroughly and systematically reviewing these cases and instituting course corrections when it does find evidence of foul play.

Ralph Nader and other progressive activists led the charge that put Proposition 103 on the ballot in California in November 1988. A very small majority of voters - 51.3% - approved the proposition. Proposition 103 encompasses a small and vital handful of basic principles related to car insurance premiums. Car insurance premiums must primarily be set by the following factors in California:

  1. The number of years of experience as a driver;
  2. The safety record of the driver during those active driving years; and
  3. The average number of miles driven each year by the driver.

Additionally, insurers are strictly prohibited from using a "thin file" excuse; in other words, new drivers cannot be penalized for the absence of a prior policy. (This "thin file" rationalization is a common rate-setting practice by credit card issuers and banks that make consumer loans.)

The possible consumer gains in the other 49 states

Sit down before reading this bit: if the other 49 states put these California-born initiatives in place to regulate auto insurance premiums, consumers would collectively save $350 billion over the next 10 years.

And here's the biggest kicker - even with these regulations and benefits to consumers, insurance companies that offer these policies will maintain a reasonable amount of profitability. These reforms don't rob insurance companies for the sake of consumers. They merely balance the current outrageously lopsided scale of financial benefit in the auto insurance industry.

If ever there was a consumer advocacy campaign that we should get behind, that every progressive politician should endorse and support, this is it. This is a social, economic, and political issue that is predicated on nothing more than fairness. Armed with this comprehensive report from the Consumer Federation of America, it's only a matter of time before we see massive innovation and consumer-driven disruption in the auto insurance industry. Some ingenious and informed entrepreneur is surely going to swoop in and shake up this market. 

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