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How premiums are set

Frustrated black woman stuck in traffic jam
tommaso79 / Shutterstock

In May, the Federal Insurance Office (FIO), a part of the U.S. Treasury Department, said it would launch a study on the affordability of car insurance, particularly in low- and moderate-income areas, and the impact that “non-driving” factors have on premiums.

Those factors include credit history, homeownership status, marital status, occupation, education and where you live.

Insurance companies have relied on such information for a long time. They say these factors are closely tied to a driver’s risk of making a claim, and thus ensure people who should pay more do pay more. That allows people who pose lower risks to pay less.

Critics of this system believe the use of non-driving factors is unfair and discriminates against lower-income and minority drivers — one of the main reasons the government is taking a look.

The FIO’s investigation follows a February CNN town hall meeting in which President Joe Biden ridiculed the fact that some people pay higher insurance premiums because of where they live.

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Consumer groups jump into the fray

Empty streets in Downtown Los Angeles cause the  coronavirus pandemic emergency
magraphy / Shutterstock

In a July letter to the FIO, more than 20 consumer groups emphasized how important it is for auto insurance — “the only product that most Americans are required to purchase by law” — to be affordable and fairly priced.

“Even drivers with unblemished driving records may find that the cost of coverage in their community and for people with their socio-economic characteristics far exceeds their family budget,” according to the letter.

The groups — which included the Center for Economic Justice, Consumer Federation of America and the National Community Reinvestment Coalition — also slammed the industry’s handling of the COVID-19 pandemic.

Stay-at-home orders kept drivers off the road, which meant fewer accidents and insurance claims. While many insurers offered refunds, those givebacks were “woefully inadequate,” the groups say, and a lot of these companies have already started upping rates again.

The FIO report will build upon an earlier government study from 2017 that found 18.6 million Americans live in areas where auto insurance costs are disproportionately higher.

That study was intended to provide a baseline for affordability that could be used by policymakers, regulators and consumers. It was intended to be conducted annually but was never updated after 2017.

What the insurers say

Loss Adjuster Using Digital Tablet In Car Wreck Inspection
Monkey Business Images / Shutterstock

In a 25-page July memo to the FIO, the Insurance Information Institute defended the industry, saying U.S. auto insurers accurately price their policies by using a wide variety of factors that comply with state laws and regulations.

“There is no credible evidence that insurers charge more than they should, either across the broad market or in specific subsegments such as neighborhood, race, income, education or occupation,” the trade group says in the memo.

The Institute says that rising costs of claims have been the primary reason rates have increased. The size of the average auto property damage claim, it says, rose nearly 6% a year between 1962 and 2013 — “far faster than inflation.”

Still, some states have already taken action to limit how certain data is used to set insurance premiums. Recently, Washington temporarily banned the use of credit scores in setting rates for some insurance policies. New Jersey and Nevada have taken similar steps.

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If you can’t afford to wait for lower premiums

Credit Score Check Online For Business Loan
Andrey_Popov / Shutterstock

Until rules change — if, in fact, they do — there are a few things you can do to ease your insurance burden.

As long as auto insurers are using your credit information to determine your premium, you should be sure yours is top notch. If you haven’t checked in a while, it’s easy to have a look at your credit score for free.

If your score looks less than stellar, try paying down some of the debt you racked up during the pandemic with help from a lower-interest debt consolidation loan. You might be able to free yourself from debt years sooner.

But most of all, make sure you’re not overpaying for your coverage by shopping around for a better rate. It’s a good practice to review your policy every six months; you could save as much as $1,000 a year.

The same goes for your homeowners insurance and health insurance. Different companies weigh risk factors differently, so it’s worth checking whether you can save with a simple switch.


Unexpected vet bills don’t have to break the bank

Life with pets is unpredictable, but there are ways to prepare for the unexpected.

Embrace Pet Insurance offers coverage for treatment of accidents, illnesses, prescriptions drugs, emergency care and more.

Plus, their optional wellness plan covers things like routine vet trips, grooming and training costs, if you want to give your pet the all-star treatment while you protect your bank account.

Nancy Sarnoff Freelance Contributor

Nancy Sarnoff is a freelance contributor with Moneywise. Previously, she covered commercial and residential real estate for the Houston Chronicle where she also hosted Looped In, a podcast about the region’s growth, development and economy. Her work has been recognized by the National Association of Real Estate Editors and the Society of American Business Editors and Writers.


The content provided on Moneywise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.