Biden Wants to Shake Up Car Insurance Rates, and You Could Wind Up Paying Less

Sound strange? That’s why the Biden administration is taking a hard look at how auto insurers set their premiums — an investigation that could have a dramatic effect on how much you pay.

How premiums are set

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.

Consumer groups jump into the fray

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

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.”