Auto Rates Shift Into Lower Gear
But insurance firms' move to tiered pricing (and credit checks) may cost some drivers more
Drivers fuming about sky-high gas prices are at least getting good news this year from another nemesis--insurance companies. Annual jumps in auto premiums have cooled, and some drivers are actually seeing cuts.
After average increases of 2.8 percent to 7.8 percent a year between 2001 and 2004, spending on coverage for 2005 is forecast to rise just 1.5 percent. "By the end of the year, the average change in bills could be close to zero," says Robert Hartwig, chief economist at the industry's Insurance Information Institute.
Major firms are reining in rates and offering bigger discounts to safe drivers. AIG on June 30 implemented a 4 percent rate cut in New Jersey, a state it once intended to pull out of because of poor profits. It plans a similar cut in September in New York.
Even frequent critics of insurance industry practices say the turn in rates is real. J. Robert Hunter, director of insurance at the Consumer Federation of America, says there may be several years of low to no increases as insurers go through an often recurring cycle. Robust rate boosts, as occurred after 2000, lead to improved earnings and are followed by a period, as now, of flatter rates and intensified battling for market share.
Slowing down. Helping restrain premiums is a slowing in accident claims. "Baby boomers in their 40s and 50s are firmly ensconced in the safest driving years," says Hartwig.
That, plus attacks on claim fraud, helped make 2004 the first year since 1978 in which auto and property insurers had an overall profit from underwriting, as opposed to offsetting losses with investment gains, according to A. M. Best Co., which rates the firms. At State Farm, the largest car insurer, a $33 million loss on auto underwriting in 2003 turned into a $1.8 billion profit last year.
Some drivers, however, may not fully share in an easing of premiums because of tiered pricing, a fast-spreading move by insurers to more finely judge a client's likelihood of filing a claim and thus the premium to charge. Drivers are being pigeonholed into more categories of risk as dozens of rating variables are expanded into hundreds, with insurers arriving at a premium by commingling such factors as age, traffic violations, past accidents, miles driven, residence, and even credit ratings. State Farm, which will fully roll out tiered pricing by the end of next year, says that under its old formulas, for example, a 39-year-old and a 49-year-old might each have paid the same amount, but with more gradations, a 49-year-old might now pay now less than the 39-year-old.
The concept of tiered pricing is to reallocate how a firm's total premium income is collected but not to necessarily boost the overall amount. So, depending on your rating, you could be asked to pay for a bigger or smaller piece of the overall pie. That can be good news for drivers deemed less risky and bad news for others. "Better drivers in a system that's less refined provide a subsidy to people who have poorer driving records," says the Insurance Institute's Hartwig.
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