Triple-I: Auto insurance pricing accuracy is driven by the variety of rating-factor factors

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Triple-I informed the U.S. Treasury Department’s Federal Insurance Office this week that lower-risk drivers should be paying less for auto insurance. Premiums have closely followed broader U.S. economic trends for decades.

Triple-I responded to a federal Information Request and stated that U.S. auto insurance companies accurately price their policies using a variety of rating factors. All of these factors must be in compliance with the laws and regulations applicable to the state where the auto insurance policies will be sold.

Triple-I stated that there is no evidence to support the claim that insurers are charging more than they should. This applies both to the whole market and specific sub-segments like income, education, or neighborhood. According to the letter, U.S. auto insurance companies use rating factors to price policies. They are continually retested to verify their reliability and accuracy.

The letter stated that “if rating factors do their jobs well, insurance can be relatively affordable for some people and very expensive for others.” The assessment is correct in both cases. The coverage is less expensive for drivers who pose less risk.

FIO’s information request revealed that the price of an insurance policy can vary greatly from one customer to another and from one state to the next. The state governments regulate insurance.

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Triple-I stated that insurance companies and their actuaries have emphasized the importance of finding factors to ensure customers pay the right rate. Rates are determined based on historical losses for similar risks. The price customers pay to insure their property is called the premium.

Critics have voiced concerns about U.S. auto insurance pricing practices. They claim that some rating factors such as credit scores and the geographic location of customers’ residences discriminate against low-income drivers and minorities. Triple-I explained that eliminating any rating factors – regardless of their reason – will force those at lower risk to overpay for automobile insurance, while those at greater risk will be able to pay less for auto insurance.

Interventions could backfire

Triple-I said that “eliminating factors does not affect the truth that it reveals, and if factors reveal high costs for a customer then banning them does not change the underlying cost that is the reason the rate has been high.”

Sometimes regulators intervene in rating processes to lower insurance costs for certain groups. They cite the need to make insurance affordable.

The Triple-I letter states that interventions no matter how well-intentioned may backfire in a dramatic wayIt “raises the overall cost, significantly restrict availability, and stifles developments that could address this issue,” the report states.

Real problems require real solutions

Triple-I states that there are real solutions to making insurance more affordable.

Improvements to the transportation environment, as well as addressing social issues that often force minorities or low- and medium-income people to drive in areas where auto insurance is most expensive, are some of the suggested solutions.

Triple-I extensive research has shown that increasing claims costs are the main factor in driving up auto insurance rates.

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