The telecommunications industry has been notorious for a phenomenon that is now a rallying cause of consumer groups all over the world: bill shock. Recently, it seems the car insurance industry is following suit, with its introduction of various charges and rating schemes unexpected by policyholders.
Setting car insurance rates
Insurance rates and premiums are determined using the concepts of the rarefied field of actuarial science. Actuaries (no, not fortune tellers), as professionals who determine these rates are called, traditionally assessed risk based on statistical and mathematical methods to factor in age, driving record, driving habits, a car model’s safety record, and other variables in order to determine insurance rates.
Lately however, the actuaries are getting creative. Instead of the traditional variables, auto insurance companies now began looking at the individual driver’s financial standing, field of work, and educational level in determining their premiums.
According to industry watchers, several non-driving factors are becoming more and more important. Chief among these is an individual’s credit score, which is now evaluated when applying for vehicle insurance.
However, experts warn that these new criteria tend to punish poor people and minority customers. Aside from credit score, firms now also evaluate an applicant’s educational background and occupation. These are areas where minorities and the poor are compromised.
This assertion is borne out by studies. In a research published by UCLA, it was established that automobile insurance rates vary widely, and that they tend to be higher in poor and minority neighborhoods.
It is estimated that almost one-third of premiums in the US now are set using educational and occupational factors along with the more traditional criteria of driving history, age, safety rating of the auto, and similar categories.
Business is business
Morality aside, it must not be forgotten that the auto insurers are running a business – they should be expected to look for ways to get a profit. Like any other business, innovation is key in generating profit margins.
At the side of the insurance industry, it is perfectly legitimate to study their consumer’s economic patterns to determine how much they should charge for their business. And they are claiming that the factors of educational background, work history, and credit score are statistically significant in their line of work.
True, it seems unfair to discriminate based on the education, employment record, and spending patterns of an applicant. But insurance firms are saying that these are indispensable factors in determining whether policyholders will file a claim or not, that is, if they will make a profit or pay out to the customer.
To prevent this system being abused by the insurance establishment, they are required by state insurance regulators to disclose what factors they are using to set insurance rates. Some states also prohibit using credit information for car insurance, such as California, Hawaii, and Massachusetts.
Still, each company has its own specific evaluation method. This cannot be disclosed entirely; this is a closely guarded trade secret much like a famous recipe.
The only alternative left is to research thoroughly for the best auto insurance quotes, balancing coverage against price. If business is running rampant, perhaps only the competition can tame them.