Personal auto risk could lower insurance rate

The auto insurance industry is very competitive. Many companies offer drivers multiple kinds and levels of coverage. Since drivers tend to stick with their auto insurer for years, companies spend heavily on advertising to get them to switch.

One result is that in general the cost of an auto policy reflects the risk that the company will have to pay a claim under the coverage provided.

For about a century, auto insurers have worked to determine that risk -- for example, how likely a driver was to get into an accident or have their car stolen -- by using demographic information. This included the driver's location, driving history, age, gender, type of car, and more. Later, factors such as their credit score were added. The mix of factors has been continually tweaked to better match the risk assessment to the real-world claims experience.

Unsurprisingly, these factors point to greater risk in low-income urban areas. Cars are older and less safe there, more likely to be stolen and more likely to collide in heavy traffic. Since such areas have proportionately larger minority populations, for more than a decade advocates of economic justice have pushed for regulations to stop companies from using factors to determine that greater risk.

They've had some success, and California, Hawaii, Maryland, Massachusetts, Michigan, Oregon and Utah have forbidden insurers from using credit scores in their rate setting or other decisions.

So far the push has failed in New Jersey. Last month a bill died in the state Legislature that would have prohibited the "use of education, occupation, homeownership status, marital status or credit score in certain automobile insurance determinations." It had narrowly passed the state Senate last year but couldn't clear the Assembly, so expect it to be introduced again.

Holly Bakke, former state commissioner of Banking and Insurance, last year said the legislation would be a step back toward the decades of overregulation of auto insurance. That led to the costliest policies in the country, four of the six largest insurers not doing business in the state, and 80% of drivers subsidizing bad drivers.

Deregulation worked, companies became competitive again, and today New Jersey has the lowest uninsured motorist rate in the nation at 3.1%.

The Insurance Council of New Jersey analyzed the potential impact of the bill restricting how insurance companies determine auto-claims risk. If it became law, "as many as 54% of New Jersey drivers could see an immediate increase averaging nearly $400 in their annual auto insurance premiums."

This sounds like going back to having good drivers subsidize bad drivers.

There is an alternative these days for the good drivers who are exceptions to the multiple factors suggesting they are riskier to cover.

Technology and auto insurers have made it possible to assess the risk of individual drivers. With either a transponder that plugs into the car or a smartphone app, a driver can provide their insurer with data on how they behave behind the wheel. That can include time and distance driven, hard braking and acceleration, speed, fast cornering, time of day driven and phone usage while driving.

Favorable data can result in lower rates, while risky driving can increase them. Among insurers offering such programs are Allstate, American Family, Farmers, Geico and Nationwide.

This won't fully liberate individuals from the generalizations necessary to make mass-market insurance work, but it might help.

And it has another very positive aspect. The programs let drivers see how they appear to insurers, so they can adjust their behavior to get a better insurance rate -- and drive more safely in the process.