By Craig Guillot
Renters in some cities may be paying significantly more for auto insurance than homeowners.
A new analysis by the Consumer Federation of America of auto insurance premiums reveals that major auto insurance companies can charge drivers as much as 47% more for basic liability insurance if they do not own their own home.
The CFA used a profile of a 30-year-old female motorist with good credit, a perfect driving record and a 2005 Honda Civic. They then obtained insurance quotes from seven of the nation’s largest auto insurers in ten cities. On average, the renter was quoted a premium that was 7% higher than that quoted to a homeowner.
“It unfairly discriminates against lower income drivers. It shouldn’t matter if a good driver rents or owns their own home,” says CFA Insurance Director Robert Hunter.
Michael Barry, vice president of media relations at the Insurance Information Institute, says many insurers have simply found through data and analytics that homeowners tend to have fewer losses in the auto insurance market. Homeownership status is used in conjunction with a variety of variables that range from credit score to marital status and education.
Barry says it’s not that renters are penalized, it’s that homeowners are often given discounts. “In some cities, renters may pay more simply because the homeowners are being given a discount because the insurer may have better loss experiences with homeowners,” he says.
The CFA study revealed that premiums can vary widely by city and insurer. One insurer showed no premium differences between renters and homeowners while another quoted renters an average of 19% more. The top two cities where renters paid higher premiums than homeowners were Louisville, Ky., and Tampa, Fla.
“There’s a remarkable difference between companies, and even within a company between cities. It makes you wonder about the soundness of these factors because you’d think the company has the same underwriting criteria in pretty much every state,” he says.
Robert Hoyt, Ph.D., professor of risk management and insurance at the University of Georgia in Athens, Ga., says insurers are highly secretive about how they calculate their premiums. While insurers may have data indicating higher loss rates for renters, he suspects insurers could also see an element of “stability” tied to homeownership. Those homeowners may be more inclined to bundle the auto insurance with their homeowners insurance, they may be less likely to move as often, and they may have higher rates of multi-vehicle policies. Because the cost of acquisition can be high, insurers make their best profits by holding policies for longer periods of time.
“They want people that are going to stick around for a few years. I suspect some find that [homeowners] are more profitable and attract them with lower rates,” says Hoyt.
Homeownership status is just one factor in hundreds of combinations used to determine premiums, says Lars Powell, PhD, Director of the Alabama Center for Insurance Information and Research at the University of Alabama in Tuscaloosa, Ala. Powell says in the highly-competitive auto insurance market, insurers have a vested interest in offering the lowest possible premiums to ensure a profit based on their risk calculations.
Powell says many insurers also have preferred markets and can price policies higher for segments of the market they deem less profitable. It’s why insurers can have drastically different premium quotes for the same driver. Powell says while some companies may prefer to do business with and can offer lower premiums for high-risk drivers, others may tweak their premiums to attract more homeowners than renters.
“It’s not a bad thing or something that warrants public policy solutions. It’s just what insurers do to ensure their rates are accurate and that they can make a profit for [forecasted losses]. I tell consumers to shop around because are always insurers that want your business more than others,” says Powell.
Some insurers don’t view homeownership as a factor in premiums. One major insurance company in the study did not quote any difference in premiums between homeowners and renters in any of the ten cities. Another insurer even quoted a premium that was 11% less for renters in Chicago.
Barry says regulatory environments in different states can also impact how insurance companies determine risk and premiums. In California, for example, insurers are prevented by consumer protection laws from using homeownership status.
Nevertheless, higher premiums for renters can have a “profound impact” on the poor because it forces them to pay a larger portion of their income for insurance, says Hunter. According to data from the Federal Reserve, renters have a median income of $28,000 compared to $63,000 for homeowners. “A big impediment on poorer people being able to buy a car is often the insurance. How can you ask someone, who has good credit and a clean driving record, who is making $12,000 per year to pay, $2,500 when an MBA who owns her own home pays $580,” says Hunter.
The CFA is calling for regulators and policymakers to end the use of homeownership and non-driving factors in setting premiums. Hoyt says shopping around remains the best way for renters to avoid paying more than they should because premiums can vary significantly.
“Pricing models are becoming more granular and there’s increasing competition in most states. Look around online, call an agent. Consumers have plenty of options nowadays.
