Monitoring Availability and Affordability of Automobile Insurance

SUMMARY: The Federal Insurance Office (FIO) of the U.S. Department of the Treasury (Treasury) issues this notice pursuant to its authority to monitor the extent to which traditionally underserved communities and consumers, minorities, and low- and moderate-income (LMI) persons have access to affordable personal automobile insurance. In July 2015, FIO sought comments from stakeholders, including state insurance regulators, consumer organizations, representatives of the insurance industry, policyholders, academics, and others regarding: FIO's proposed working definition of "affordability" in relation to personal automobile insurance; the key factors FIO should use to calculate an affordability index for Affected Persons (e.g., premium, income, and other metrics); and how best to obtain appropriate data to monitor effectively the affordability of personal automobile insurance for Affected Persons. After carefully considering all the comments received in response to this and a previous solicitation, in conjunction with additional research and consultation, FIO has adopted a method to measure the affordability of automobile insurance for Affected Persons: FIO will calculate its Affordability Index by dividing the average (or mean) annual written personal automobile liability premium in the voluntary market by the median household income for U.S. Postal Service ZIP Codes (ZIP Codes) identified as being majority-minority or majority-LMI. FIO will presume that personal automobile liability insurance is affordable for Affected Persons if the Affordability Index is less than or equal to 2 percent.

To undertake the study of the affordability of automobile insurance for Affected Persons, FIO will collect and analyze premium data received and aggregated by statistical agents. In addition, FIO will use data publicly available through the U.S. Census Bureau. In combination, these data sources should facilitate analysis necessary for FIO to monitor the affordability of personal auto insurance for Affected Persons. FIO will report its findings annually, and note, among other things, the trend of the Affordability Index relative to each of the ZIP Codes analyzed.

FOR FURTHER INFORMATION CONTACT: Lindy Gustafson, Federal Insurance Office, 202-622-6245 (not a toll free number).

SUPPLEMENTARY INFORMATION:

I. Background

Subtitle A of Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Wall Street Reform Act) established FIO in Treasury and provides it with a number of authorities, including the authority to monitor the extent to which traditionally underserved communities and consumers, minorities, and low- and moderate-income (LMI) persons (collectively, Affected Persons) have access to affordable insurance products regarding all lines of insurance, other than health insurance. /1/

FOOTNOTE 1 31 U.S.C. 313(c)(1)(B). END FOOTNOTE

In notices published in the Federal Register by FIO in April 2014 (April 2014 Notice) /2/ and July 2015 (July 2015 Notice), /3/ FIO explained the reasons it is monitoring the availability and affordability of personal automobile liability insurance for Affected Persons. They are:

FOOTNOTE 2 Monitoring Availability and Affordability of Auto Insurance, 79 FR 19,969 (Apr. 10, 2014) (April 2014 Notice). END FOOTNOTE

FOOTNOTE 3 Monitoring Availability and Affordability of Auto Insurance, 80 FR 38,277 (Jul. 2, 2015) (July 2015 Notice). END FOOTNOTE

1. Nearly all jurisdictions of the United States generally require a driver or owner of a motor vehicle to maintain automobile liability insurance or financial security that may be satisfied by automobile liability insurance and that is applicable at the time of an accident, while operating a motor vehicle, or at the time of registering a motor vehicle;

2. On a nationwide basis, the percentage of uninsured motorists was approximately 14 percent between 2002 and 2009, before decreasing to 12.3 percent in 2010, 12.2 percent in 2011, and 12.6 percent in 2012;

3. Owning an automobile gives low-income commuters greater access to jobs since public "transit only enables [low-income commuters] to reach less than one-third of metro-wide jobs within 90 minutes . . . while the automobile enables them to reach all jobs in the 51 largest metropolitan areas within 60 minutes;" /4/ and

FOOTNOTE 4 Clifford Winston, "On the Performance of the U.S. Transportation System: Caution Ahead," Journal of Economic Literature, Vol. 51, No. 3 at 805 (2013) (citations omitted), available at https://www.aeaweb.org/articles?id=10.1257/jel.51.3.773. END FOOTNOTE

4. Although some stakeholders have asserted that automobile insurance has become more affordable over time, representatives for consumers continue to assert that automobile insurance has become less affordable for Affected Persons.

A. The April 2014 Notice

In the April 2014 Notice, FIO requested comments regarding, among other things: A reasonable and meaningful definition of affordability of personal automobile insurance, and the metrics and data FIO should use to monitor the extent to which Affected Persons have access to affordable personal automobile insurance. /5/

FOOTNOTE 5 April 2014 Notice, supra note 2, at 19,970. END FOOTNOTE

B. The July 2015 Notice

In the July 2015 Notice, FIO sought comments from the public on a framework for measuring the affordability of automobile insurance for Affected Persons. Based on comments submitted in response to the April 2014 Notice, FIO proposed a working definition for affordable personal auto insurance based on an affordability index. To do that, the July 2015 Notice set out in sequence: (1) A proposed definition of affordability; (2) a proposed definition and proposed calculation of an affordability index; (3) a proposed calculation of average premium; (4) a proposed definition of the market scope for an affordability index; and (5) a proposed definition of Affected Persons. /6/ Based on its consideration of those elements, FIO proposed the following working definition of affordable personal auto insurance:

FOOTNOTE 6 July 2015 Notice, supra note 3. END FOOTNOTE

A personal auto[mobile] liability insurance policy is affordable if the annual premiums are within the financial means of most people as measured by an affordability index for Affected Persons in the standard market. Personal auto[mobile] liability insurance is presumed to be affordable if, with respect to household income, the affordability index does not exceed two percent for Affected Persons in urban areas, for LMI persons within a specific geographic area (including rural areas), or for all individuals in majority minority geographic areas. /7/

FOOTNOTE 7 Id. at 38,280. END FOOTNOTE

i. The Definition of Affordability

In developing its working definition of affordability, FIO considered three definitions submitted by commenters on the April 2014 Notice and ultimately proposed adopting the definition of "affordability" derived from a dictionary and submitted by one commenter: "being within the financial means of most people." /8/ FIO explained that this "common sense definition may be used to develop `a practical and effective approach to monitoring access to affordable personal auto[mobile] insurance.' " /9/

FOOTNOTE 8 Id. at 38,279. END FOOTNOTE

FOOTNOTE 9 Id. (quoting Property and Casualty Insurers Association of America, at 1 (June 9, 2014), available at http://www.regulations.gov/#!documentDetail;D=TREAS-DO-2014-0001-0020). END FOOTNOTE

ii. Use of an Affordability Index

FIO observed that some federal agencies use an index to measure affordability and provided examples. For instance, the U.S. Department of Housing and Urban Development (HUD) has a publicly available location affordability index that estimates the percentage of a family's income dedicated to the combined cost of housing and transportation in a given location. /10/ Additionally, the Consumer Financial Protection Bureau (CFPB) has a definition of "qualified mortgage" based, in part, on the ratio of the consumer's total monthly debt to total monthly income. /11/ Given the use of indices by other federal agencies, and FIO's statutory authority to monitor affordability for Affected Persons, FIO endorsed the concept of an affordability index for personal automobile insurance and proposed to calculate an affordability index for personal automobile insurance for Affected Persons. /12/

FOOTNOTE 10 Id. at 38,279 & fn. 33 (citing HUD, "Location Affordability Portal," available at http://www.locationaffordability.info/lai.aspx). END FOOTNOTE

FOOTNOTE 11 12 CFR 1026.43(e)(2)(vi). END FOOTNOTE

FOOTNOTE 12 July 2015 Notice, supra note 3, at 38,279. END FOOTNOTE

iii. Average Premium

FIO stated that an affordability index for Affected Persons may be derived from a broad set of criteria, such as the average premium for personal liability insurance, personal injury protection, comprehensive insurance, collision insurance, uninsured motorist insurance, and underinsured motorist insurance; or more narrow criteria, such as the average premium for personal automobile liability insurance for a given year. /13/ FIO proposed to limit the calculation of an affordability index to the average annual personal automobile liability insurance premium for Affected Persons after considering comments to the April 2014 Notice. FIO chose this approach because states generally require the purchase of personal automobile liability insurance as a condition of driving or owning a motor vehicle. /14/

FOOTNOTE 13 Id. END FOOTNOTE

--This is a summary of a Federal Register article originally published on the page number listed below--

Notice; advising adoption of methodology to monitor affordability of personal automobile insurance.

Citation: "81 FR 45372"

Federal Register Page Number: "45372"

"Notices"