New York May Stop Asking for Your Profession When Getting Car Insurance

Asking for one's profession when getting car insurance has been a frequently criticized practice. New York State however is poised to be just the 4th state to ban it pending further review from the state's Department of Financial Services. We also explore the topic of rating car insurance in context of socio-economic factors.

New York State may become one of the few states that will stop the practice of asking for your profession when filing an auto insurance quote, according to the Wall Street Journal. Often subject to criticism, auto insurance companies defend the practice by saying it helps get better premium pricing. Regulators on the other hand feel the practice may be disproportionately affecting those with less skilled professions, causing them to pay higher rates. According to the Journal, the New York Department of Financial Services asked GEICO, Progressive, Allstate and Liberty Mutual to explain why the practice shouldn't be suspended.

From the side of the insurers, actuarial science, the science of assessing risk, has shown that those drawn to professional positions like engineers and dentists tend to have lower claim rates than those in less skilled positions like manufacturing jobs. The deduction from these findings is that those of a more cautious nature are drawn to professional jobs. Regulators argue however that insurance based on driving should only be judged based on how well a person drives. According to the Journal article, the superintendent of the New York Department of Financial Services wishes to evaluate the defense of the four car insurers then weigh whether the practice should be banned. While most state insurance departments have no legal ground to ban a practice which has actuarial backing, New York allows its department to forgo some practices, even if they are scientifically backed.

Are Those With Unskilled Jobs Being Disproportionately Affected?

At ValuePenguin, we actually took a look at this topic in the summer of 2016. We examined every neighborhood in Chicago and determined whether there was a difference in rates for neighborhoods with low income, high unemployment and a low amount of skilled workers. We found a statistically significant relationship for all three of those factors. In terms of profession, neighborhoods in Chicago that had a higher amount of manufacturers and other unskilled professions paid on average 11% more than neighborhoods with a higher amount of professional laborers. In neighborhoods where the average income was as low as $25,000, the few extra hundred dollars per year for car insurance becomes significant. The figure below summarizes our findings.

Car Insurance Costs in Chicago Decrease With The Number of Professionals in a Neighborhood

There are clearly more neighborhoods in Chicago with a higher percentage of unskilled workers, but most of those neighborhoods tend to cluster around the higher percentiles for car insurance price in the city. You do not find a neighborhood with one of the lowest yearly prices until that neighborhood is at least 20% professional worker.

A Technological Push to Better Rate Drivers

This debate is not new. For a long time now, insurers have pushed for new ways to rate drivers, while regulators have scrambled to keep pace. The push has in part been spurred by a tough few years for auto insurers. A drop in oil prices, combined with unusually inclement weather, have led to an increase in accidents and pay outs. According to the National Highway and Traffic Safety Administration, fatal car accidents have jumped up 10.4% in the first 6 months of 2016 compared to 2015, the largest increase in 50 years. In a previous report of ours, we found that only three of top 10 car insurers in the nation had net positive insurance revenues in 2015. Essentially, the car insurance companies are looking for better ways to rate drivers, thus increase revenue, in conditions ill suited for car insurers.

Since 2011 companies like Progressive and Allstate have created technologies that drivers can hook up to their vehicle which monitors their driving habits. Things such as when you drive, how fast you drive, how hard you break, etc are supposed to give these companies a better insight, thus a easier way to price your rates. Programs like the Progressive Snapshot are advertised as a way for good drivers to save money, to incentive customers to sign up. Unfortunately, those who overestimated their driving ability actually ended up paying more for their auto insurance. These programs, though growing in popularity, are still not being adapted by a large portion of consumers.

The next push seems to be forming around usage-based insurance. Metromile is the newest company that bases the majority of it's rate on how much a person drives. Though currently only in seven states, a recent round of funding will allow the company to aggressively push to others. Lastly, State Farm and Allstate have both filed patents within the last year to rate people based on the riskiness of the routes they drive. Drivers who prefer faster, but possibly more accident prone roads, will have to pay more. The technology is still a few years away, but further underscores the wave taking over insurance companies to find ways to better rate drivers.

Mark is a Senior Research Analyst for ValuePenguin focusing on the insurance industry, primarily auto insurance. He previously worked in financial risk management at State Street Corporation.

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