Insurance rates have been soaring and consumer advocates are blaming insurers for setting rates in an inequitable manner. The increase is alarming; rates have risen at more than twice the rate of inflation. The national average for premiums is $1427. Some of this upsurge is related to weather events, but some believe that the rate increase may also be evidence of improper conduct.
Consumer advocates have alleged that insurance companies are using Big Data to establish rates. The methods used to set these rates are not transparent. Car insurance premiums are therefore being determined by factors, such as credit ratings, that have little to do with driving records. A Consumer Reports study found that insurance companies use “price optimization” models to set rates. These methodologies take into account personal data and models to determine whether a buyer is likely to accept price increases in their insurance.
The tendency to rely on credit ratings and similar factors is most detrimental to low-income drivers. A study by Consumer Reports found that leading insurance companies were charging minority drivers in targeted neighborhoods as much as 30 percent more than drivers with similar profiles in other regions. Moreover, state insurance regulators have failed to properly regulate the use of Big Data to set these higher rates. A website that compares auto insurance rates found that rates have risen more than 20% since 2011. A driver with a low credit (300-579) score pays significantly more for insurance than someone who has a score above 800.
Now California has introduced legislation to compel federal authorities to investigate why racial disparities exist in insurance premiums. The legislation requires the submission of claims data from various ZIP codes to analyze whether higher rates in minority areas are reasonable in light of increased payouts in those regions. Supporters of the bill maintain that it is the best way to investigate whether minorities are charged higher rates for reasons that are not related to their risk profiles, given the lack of transparency by insurance companies. If the bill is passed, a report on racial inequities in car insurance premiums would need to be filed every two years.
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