Katie Wechsler, Barnett Sivon & Natter, P.C.
One of the functions of the Federal Insurance Office (FIO) is to “monitor the extent to which traditionally underserved communities and consumers, minorities…, and low- and moderate-income persons have access to affordable insurance products regarding all lines of insurance, except health insurance.” To that end, since 2014, the FIO has been studying the affordability of auto insurance. This is a brief review of the FIO’s efforts to define and measure the affordability of auto insurance.
2014 Request for Information
FIO decided to focus on affordability of personal auto insurance because “studies suggest that owning an automobile is associated with a higher probability of employment and other factors associated with economic well-being.” However, FIO quickly found that there was not a universal definition of affordability for personal auto insurance. Thus, in April 2014, FIO issued a request for information seeking input on (i) a reasonable and meaningful definition of “affordability;” (ii) metrics to use to monitor the extent to which traditionally underserved communities and consumers, minorities, and low- and moderate-income (LMI) persons have access to affordable personal auto insurance; and (iii) data sources FIO should use in monitoring this issue.
FIO received twenty comment letters in response to its request. The NAIC reported that it also is studying this issue through its Auto Insurance Study Group and that it is working on a report on issues related to low-income households and the auto insurance marketplace, including competitiveness, uninsured motorists, insurer initiatives, state laws and regulations, and actions states have taken to address availability and affordability. NAMIC addressed affordability in terms of a percentage of household income, using data from the Consumer Expenditure Survey. NAMIC also cited data showing that auto insurance “can be purchased by all income and racial/ethnic groups for amounts that are less than, or roughly equal to, what each group spends for a variety of essential and non-essential goods and services.” PCI focused on all the factors that attribute to the price of auto insurance premiums. The Center for Economic Justice (CEJ) proposed that affordability be measured as a percentage of disposable income, factoring in insurance costs beyond premiums. CEJ also asked FIO to look at the availability of insurance by comparing the number and types of products being marketed in LMI communities and non-LMI communities.
2015 Request for Information
In July 2015, FIO released another request for information, specifically asking for comment on a proposed working definition of affordable personal auto liability insurance, key metrics to calculate affordability, and the best ways to obtain the appropriate data for monitoring. In this request, FIO proposed the following working definition of affordable personal auto insurance:
A personal auto liability insurance policy is affordable if the annual premiums are within the financial means of most people as measured by an affordability index for Affected Persons in the standard market. Personal auto liability insurance is presumed to be affordable if, with respect to household income, the affordability index does not exceed two percent for Affected Persons in urban areas, for LMI persons within a specific geographic area (including rural areas), or for all individuals in majority minority geographic areas.
To meet the test of affordability under this working definition, auto insurance would need to be less than or equal to two percent of household income. FIO also indicated that it may need to collect data from insurers as they have the most complete and accurate information for FIO to perform its monitoring function.
FIO received 12 comment letters in response to the 2015 request for information. Consumer groups were generally supportive of FIO’s proposed definition. Industry, on the other hand, raised several concerns. Some argued that the proposed two percent of household income is an arbitrary threshold. Others argued that the percentage should be adjusted in each state depending on state law requirements for auto insurance. PCI argued that the definition “fails to consider the ‘pass through’ nature of the insurance mechanism” and believes that “monitoring and addressing the loss costs that drive auto insurance premiums is the best way to address affordability.” PCI also noted that auto insurance expenditures are relatively flat across income groups and thus LMI consumers spend a higher percentage of their income on auto insurance, which would be considered unaffordable under the proposed definition. If FIO must use an affordability index, PCI argued that the index be based on residual income.
FIO has yet to announce the next steps in this process. It is assumed that FIO is finalizing the definition of affordability and will then use that definition to monitor the affordability of auto insurance. ABIA will keep its members apprised of any further developments.
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