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.
Some watchdogs say insurers may be dicing risks too finely. A profusion of rating categories, for example, can distort the concept of insurance as a way to broadly share risk in a community. The Consumer Federation's Hunter questions using creditworthiness as a factor in premiums, which some states bar or limit. "Suppose I get laid off, and before getting a new job I run up some unpaid bills," says Hunter. "That may affect my credit score, but why does it make me a worse driver?" Insurers say claims data show a link, but Hunter wants a driving-related explanation for the link.
Some companies want to probe further. Progressive Insurance is testing a plan in Minnesota in which clients voluntarily install sensors on their cars to record how far and fast they drive and at what times--driving a lot between midnight and 4 a.m., for example, is considered more accident prone than during non-rush-hour daylight. The data are downloaded to a home PC every six months and forwarded to Progressive. But at least at this stage, Progressive says it will only reward favorable habits--with discounts averaging 12 percent so far--and not penalize unfavorable driving.
Hitting home. Your residence can radically affect a premium, even with a good record. A driver in Philadelphia might pay $4,142 a year for full coverage while a similar driver next door in Bensalem, Pa., might pay $2,364, according to Runzheimer International, which tracks vehicle operating costs. In Roanoke, Va., the bill might be $758. And some rates can still jump. A hypothetical policy in Detroit is up 7 percent for 2005 to $5,162.
Insurers haven't given up trying to nudge out a few more bucks.
Allstate is rolling out a plan in which customers opt to pay about 7 to 15 percent more for coverage. For that, they get a waiver on any premium hike after an accident and earn lower deductibles for accident-free driving. Another add-on can cover replacement of a totaled new car without any adjustment for depreciation. Tom Wischmeyer, a retired software development manager in West Linn, Ore., admits to a fender bender or two in recent years and says the annual $136 he pays for enhanced coverage is worth the "peace of mind" against a premium boost or an uncovered loss on his wife's new 2005 Camry.
You know things have changed in auto insurance when renewal notices are less of a stomach churner and some people even opt to pay more.
A Premium On Location
After several years of steep increases, the rise in auto-insurance premiums has slowed. But where drivers live can still make all the difference in how much they pay, even with a spotless record.
[Map of the United States]
Cities with high premiums:
Los Angeles $3,225
Las Vegas $2,323
New Orleans $2,667
Detroit $5,162
New York $3,127
Philadelphia $4,124
Cities with low premiums
Boise, Idaho $955
Columbus, Ohio $985
Green Bay, Wis. $948
Roanoke, Va. $758
Raleigh, N.C. $949
Chattanooga, Tenn. $911
Note: Average full coverage, including $300,000 liability, for an adult driver with clean record.
Change in annual premiums
2001 +4.8 pct.
2003 +7.8 pct.
2005 +1.5 pct.
[labels]
2001
2002
2003
1 pct.
3 pct.
5 pct.
7 pct.
7.8 pct.
1.5 pct.
Sources: National Association of Insurance Commissioners, Insurance Information Institute, Runzheimer International
Graphic by Rod Little -- USN&WR
This story appears in the August 29, 2005 print edition of U.S. News & World Report.