The U.S. government in recent years has started building a database of consumer complaints about banks and credit card companies, and levying millions of dollars in fines against what it believes to be bad actors. Now there's a potential new battleground in the financial services industry.
In April, a 4-year-old federal office announced that it would step up efforts to study the affordability of car insurance, an industry typically regulated by states.
Nearly every state requires drivers to have coverage, but about 15 percent of motorists are uninsured, the office said.
Created by the 2010 Dodd-Frank Wall Street Reform & Consumer Protection Act, which has mandated changes to a wide range of financial services firms nationwide, the Federal Insurance Office has the authority to, among other things, "monitor the extent to which traditionally underserved communities and consumers have access to affordable" car and home insurance.
"The Federal Insurance Office is evaluating that public input and looking to identify areas of consensus as we move to define affordability … in a reasonable manner," Michael McRaith, the office's director, said Friday. McRaith previously headed Illinois' insurance department.
Affordability, of course, hinges on an individual's income, which takes the issue beyond that of a policy's cost. Pinning down what's affordable becomes a stickier question to answer, with some doubting that it's even a major problem.
Bridge Communities, a Glen Ellyn-based nonprofit that helps homeless families in DuPage County, runs a program that gives donated cars to needy families. Bridge program director Karen Stewart said she generally has noticed that buying mandated car insurance is less of a financial hardship for recipient families than paying for car repairs and gasoline.
Indeed, a survey by the U.S. Bureau of Labor Statistics shows that low-income households spend more than twice as much on gasoline as they do on car insurance.
One insurance industry trade group, citing the same set of statistics in its public comments, makes the case that the poor, on average, spend nearly as much on alcohol and tobacco combined as they do on car insurance. The group, the National Association of Mutual Insurance Companies, counts Bloomington-based State Farm among its members.
The Consumer Federation of America, citing the same statistics, counters that the lowest-income households on average still spend $102 more on car insurance than on cigarettes and alcohol.
That would be $560 versus $458, respectively, the average data shows.
Others maintain that car insurance is best left to the states.
"Since the limits and types of auto insurance coverage are within the realm of the state, I truly believe that while the feds might have an interest in some of this, they have no business doing anything to usurp states' rights in this area," James Kamphenkel, the owner of Greenwald Insurance Agency in Greenwald, Minn., wrote in a letter to the federal office.
Paul Newsome, an insurance industry analyst for investment bank Sandler O'Neill & Partners in Chicago, said he doesn't believe the federal office will be that active on the affordability front because the states already are "aggressive when it comes to the affordability of auto insurance."
Still, the creation of the Federal Insurance Office signals that "there's a slow creep of federal regulation into the property and casualty insurance industry," Newsome said.
The cost of car insurance varies widely from state to state, according to the Insurance Information Institute.
Premiums may be influenced by such factors as driving record, driver age, residence, parking location, mileage driven, gender, the vehicle's make and model, credit score, and desired and required coverage.
The average annual cost is highest in New Jersey, at $1,184, the trade group's latest figures show. The least expensive state for car insurance is Idaho, at $535, it said, citing a recent report from the National Association of Insurance Commissioners.
Illinois ranks 25th, with an average of $727 spent on car insurance. With median household income of $56,853, residents pay on average 1.3 percent of their income on coverage, according to a Tribune analysis.
Nationally, the average expenditure on car insurance is $797. That works out to $66 a month.
Tom Feltner, financial services director for the Consumer Federation of America, said many low-income drivers are priced out of the market because of the high cost of minimum liability coverage in every state except New Hampshire, he said.
"Rather than increase penalties for driving without insurance, we need to ensure that low-cost policies are available and used," Feltner said.
The Federal Insurance Office's call in April for public feedback produced relatively few comments — about 20 — but some of the filings were long, including one consisting of nearly 150 pages. What follows are summaries from some of the submitted letters, edited for length and clarity.
Allstate Corp., Northbrook: Low-income groups most likely spend a higher percentage of income on insurance than high-income groups.
"But low-income groups probably spend a higher percentage of their income than high-income groups on all necessities," said Edward Collins, assistant general counsel for Allstate.
One way to measure affordability is whether "consumers actually purchased insurance," he said.
"Everyone wants to pay less for insurance," Collins wrote "But if low-income consumers are purchasing insurance, then by definition it's affordable."
An easy way to reduce insurance costs would be to lower the amount of required coverage, he argued.
"Revising legal requirements that force low-income individuals to purchase coverage they do not need could lower costs and make insurance more affordable," Collins said.
Affordability also could be improved by addressing some factors that drive up costs.
"Insurance fraud leads to higher premiums because it forces insurers to provide unjustified payouts, adding to the cost for all consumers," he noted. "Property and casualty insurance fraud costs at least $30 billion a year, which translates to hundreds of premium dollars per family."
In many communities, fraud rings are active.
"More vigorous law enforcement could reduce fraud and abuse, lessen the likelihood of costly litigation, and reduce costs for consumers," Collins said.
Financial Services Roundtable, Washington: The trade group for big financial services companies said a "hypercompetitive marketplace" and the Internet make it easier than ever for consumers to not only get coverage but also to compare policies and change their coverage.
The group acknowledged that some drivers have no car insurance. What's less certain, it said, is whether those consumers are in that position because of the cost of insurance, or whether they are flouting the law, or are confident that they won't get into an accident.
Other factors, too, could play a role.
"Immigrant populations may fail to carry insurance either because of cultural misunderstanding or because they lack the ability to obtain coverage because of legal barriers," said Richard Foster, the group's senior counsel for legal and regulatory affairs.
He also noted that the industry is developing flexible pricing models that would allow customers to pay for premiums at weekly or even daily intervals.
Ways to Work, Milwaukee: The maker of auto loans to low- and moderate-income consumers said the practice of using credit scores to help set prices should end because it discriminates against drivers who "because of economic circumstance, are more likely to have lower credit scores than those with higher incomes without regard to differences in driving history."
"It is not meaningful in classifying a driver's risk, but rather forces low- and moderate-income drivers to pay more than their higher-income counterparts, exacerbating their already challenging economic circumstances," said Susan Dreyfus, Ways to Work chief executive.
She also said the geographic location should be lessened as a factor. While acknowledging that cars are more likely to be damaged in urban areas, she noted that the price differential seems excessive. She cites a 2012 Consumer Federation of America survey saying that the cost of a policy sold in lower-income neighborhoods ranged from 8 percent to 94 percent more than the same policy offered in upper-middle income neighborhoods in the same urban area.
National Association of Mutual Insurance Cos., Indianapolis: Technology is making it possible for insurers to offer more precise pricing as they, for example, monitor driving habits of policyholders.
But insurers have little control over other factors that influence pricing, including medical costs, litigation and automobile repair, the group said.
"Excessive or unnecessary coverage mandates and limits on the use of credit-based insurance scores have historically decreased the availability and increased the cost of insurance products," it wrote.
Citing consumer spending figures from the U.S. Bureau of Labor statistics, the association said lower-income households spend less on car insurance than they do on, among other things, phone service and clothing, and not significantly more than they spend on alcohol and tobacco combined.
"If consumers can choose to spend nearly as much of their income on alcohol and tobacco, it seems implausible to suggest that automobile insurance is not 'affordable' for these consumers," the association said. "We believe that any attempt to define or measure automobile insurance affordability should be informed by the data" in the Bureau of Labor Statistics' consumer expenditure survey.
It also cited Bureau of Labor Statistics data showing that no income group allocates more than 2.5 percent of its spending on car insurance.
Vehicles for Change, Halethorpe, Md.: The nonprofit — which accepts car donations, repairs the vehicles and gives them to poor families — said the cost of auto insurance is a barrier to car ownership for many families.
In some states, auto insurers may factor income and neighborhood into their rates, and that shouldn't be allowed, said Marty Schwartz, president.
"In these instances, low-income families living in impoverished neighborhoods typically pay more for car insurance than wealthier residents with the same driving record," he said. "The cost of auto insurance is an excellent example of the high cost of being poor."
Most of its recipient families net less than $1,500 a month.
"For these families, car insurance can claim as much as 15 percent of their take-home pay," Schwartz said.
Auto insurance shouldn't claim more than 2 percent of a low-income family's take home pay, he said.
Tribune reporter Gregory Karp contributed.
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