During the past two weeks, through our investigative series “Wrecked: How Auto Insurance Takes Louisiana for a Ride,” the Bayou Brief has revealed how Louisiana motorists with perfect driving records often pay significantly higher premiums for basic auto insurance because of things that have nothing to do with how safe they are when they get behind the wheel.
A 60-year-old driver will find that some of the state’s largest insurers will raise her annual premium by as much as $172 after her spouse passes away. Another driver, who has never been ticketed or caused an accident, could face a nearly $1,600 premium penalty if he has a low credit score, and that’s just to buy the basic coverage required by state law. These are just a few of the ways that insurance companies have moved away from pricing customers based on how they drive and, instead, charging premiums tied to algorithms that place a lot of weight on personal and economic characteristics.
Put simply, in Louisiana, auto insurers have a license to discriminate.
On Wednesday, members of the state Senate Insurance Committee will conduct a second round of hearings on SB 89. Authored by state Sen. Jay Luneau, SB 89 is the first and only proposal in state history that would prohibit auto insurers from discriminating against widows and widowers or on the basis of gender or credit score.
For decades, the industry’s practices have either largely been ignored or simply accepted as standard. But there is nothing standard or acceptable about the kind of institutionalized and pernicious discrimination currently allowed in Louisiana.
Women may be charged more than men, and in a state where women are paid 68 cents for every dollar paid to men, the impact can be significant.
While a person’s credit score does not always directly correspond with their income, it usually does, and in a state that struggles with poverty, that means poor and lower-middle class drivers are disproportionately burdened.
Four years ago, a study by the Consumer Federation of America revealed that African American drivers pay 70% more than white drivers for car insurance, and it should come as no surprise that a state in which nearly one-third of the population is African American is also one of the most expensive places in the country for basic auto liability coverage.
Handing the premium setting of auto insurance over to these non-driving related algorithms is, obviously, unfair to the millions of Louisiana drivers who don’t have the right marital status or credit score. Just as importantly, it also harms public safety and contributes to high auto insurance rates.
When done properly, insurance pricing should send a signal to customers about how to lower their risk and, in turn, lower their premium. If you drive safely, you get a low price. If you drive a safe car, you get a low price. If you are wild on the road and your vehicle has a history of dangerous rollovers, you pay more. The premium drivers are charged will reinforce safety and incentivize higher risk drivers to change their behavior.
But what signals do consumers get nowadays when they open up their insurance bill?
“Fix your credit.” “Don’t let your husband die.” Or, at least, “Remarry soon after the funeral.”
If you can’t address those personal issues, you can’t lower your premium. But if you stay married and maintain an excellent credit score, you can be convicted of drunk driving and still pay a comparatively lower rate.
Insurance companies claim that these new pricing systems are the result of complex, data-driven research. But, really, the industry is just being lazy and greedy.
False Prophets Offering False Profits:
In Baton Rouge, state legislators are currently debating a number of proposals that claim to be designed to reduce the price of car insurance, the most notable of which, so far, is state Rep. Kirk Talbot’s HB 372, the so-called “Omnibus Premium Reduction Act of 2019.” Stephen Waguespack, president of the Louisiana Association of Business and Industry (better known as LABI), told his organization’s members that Talbot’s bill was the most important bill of the current legislative session. Now 45, Waguespack spent the bulk of his thirties working for former Gov. Bobby Jindal, eventually serving as Jindal’s Chief of Staff.
Initially, Waguespack had parroted the flimsy talking point that HB 372, which had been heard by the House Civil Law Committee instead of the Insurance Committee, was truly about reducing the price of car insurance, but after the bill passed the House, he relinquished the pretense. This was about tort reform, plain and simple.
LABI had never been able to get its name right anyway. When the full state House deliberated the bill last week, LABI sent a floor note to House members, incorrectly calling the proposed legislation the “Omnibus Insurance Rate Reduction Bill.”
State Rep. Kirk Talbot, whose campaign finance reports read like a veritable Who’s Who of the state’s insurance businesses and agents, had actually authored a tort reform bill masquerading, unconvincingly, as a consumer protection bill.
There is zero empirical data that any of the proposals in the bill will result in a reduction in car insurance premiums. It is, instead, a grab bag of the industry’s wish list.
Louisiana may have the highest civil jury threshold in the country, but unlike other states, Louisiana doesn’t cover the costs of conducting a jury trial; that’s a risk plaintiffs must be willing to take. In some parishes, a typical jury trial can cost as much as $8,000. It’s not hard to determine why a person with a $5,000 claim for damages would be reluctant to risk nearly twice that amount merely for the opportunity to have their case heard in court. We also know, definitively, that there is no correlation between a jury trial threshold and the price of car insurance. Liability coverage is more expensive in at least three other states, none of whom have a threshold because they already cover the costs of jury trials.
This is nothing more than a ham-handed attempt to tip the scales of justice, a gift to the industry that, ostensibly, lawmakers should be regulating, and it was presented to the public with the quaint and almost laughable belief that, instead of maximizing profits, insurance companies will instead pass along whatever savings they realize from legislating their way out of court back to their customers.
To be fair, the insurance industry actually has a long history of investing in efforts to reduce risk in partnership with its customers. Not only is pricing supposed to send the right signals, the industry also backed safety measures. In response to increasing auto accident risks, insurers developed the Institute for Highway Safety to make roads and cars safer. At the turn of the 20th century, the industry developed Underwriters Labs to make homes safe from electrical appliance risk. Insurers invented lifeboats for cruise lines and developed safe boilers in reaction to increasing claims for those risks.
But with the auto insurance pricing practices we now see in Louisiana, the industry has stopped trying to forge a partnership with customers to reduce risks and rates and is, instead, letting unrelated data determine our fates.
It should not be too surprising to learn that state Sen. Jay Luneau’s proposal to eliminate the types of pernicious discrimination currently allowed has already been opposed by the auto insurance industry. But it may be surprising to hear what their top lobbyist, Kevin Cunningham, had to say to members of the state Senate Insurance Committee last week, during their first hearing on Luneau’s bill.
“I think it’s a misnomer to ever really believe that your (car insurance) rates are ever going to go down,” Cunningham, a lawyer and a partner at Southern Strategy Group, admitted in a remarkable moment of candor during an exchange with state Sen. Rick Ward III. Cunningham, a lobbyist for the auto insurance industry, perhaps unwittingly, revealed that state Rep. Kirk Talbot’s “price reduction” proposal wouldn’t actually reduce prices.
It wasn’t the first time Cunningham seemed to slip up and tell the truth. At another point, when asked specifically about the possibility that state Sen. Luneau’s bill prohibiting marketplace discrimination would result in price reductions, Cunningham argued that the bill would not necessarily cause net decreases; instead, he claimed that it would merely shift the cost burdens from one class of consumers to another.
“(SB 89) just means that 12% that’s paying a little bit more, that they’ll pay a little bit less. But the 39% that’s paying less will pay a little bit more. It’s just shuffling cards at this point.” Cunningham said. “You’re just taking one group and subsidizing with another. It doesn’t change behavior. It doesn’t pull any claims out of the system. It doesn’t lower any cost in the system because those same premium dollars still have to come out in order to cover the claims.”
Although couched somewhat disingenuously, this is nonetheless a damning and important admission: No matter what you try to do, insurance companies are going to hit their revenue targets. Right now, they’re forcing people who have been victimized by legal discrimination to subsidize those who haven’t been. If you close that loophole, “it’s just shuffling cards.”
“A big problem is that the things that make your rate go higher are often just proxies for class and race,” argues Douglas Heller, a nationally acclaimed insurance expert who, in collaboration with the Bayou Brief, has spent the past month researching the industry’s practices in Louisiana.
“The Shuffling Cards argument — which is not incorrect in a vacuum— is that Auto Insurer A has to collect $850 million one way or another,” Heller explains.
In his hypothetical, which is based in data about one of the state’s largest insurers, high credit score drivers now collectively pay $300 million, while low credit score drivers collectively pay $550 million. When you eliminate credit score as a factor, those low credit score drivers will see their collective premiums drop by down to an aggregate total of $425 million, a net reduction of $125 million. But high credit score drivers will see their premiums go up to an aggregate total of $425 million, a net increase of $125 million. All to guarantee Auto Insurer A collects its $850 million.
But that’s just half of the story, according to Heller.
“Industry lobbyists stop there as if that’s the only moving part. But in reality, so many other rating factors are involved that when you change one factor you alter the dynamics of the rating process and, when done right, safe drivers get a benefit, and dangerous drivers have to take more responsibility for their actions (i.e. pay higher premiums),” he says. “That, in turn, creates more incentives for safe driving, which lowers the rates for everyone, and opens up the market to more drivers (who were previously and unfairly excluded), which also lowers the rate for everyone.”
Fixing Claims and Claiming Fixes:
Legislators do not shoulder all of the blame.
Unfortunately, Jim Donelon, the state’s Commissioner of Insurance, has sided with the insurance industry in allowing companies to use these non-driving data points to price policies even if the premiums do nothing to lower the risk of future claims. Commissioner Donelon has provided insurance companies the ability to shirk their responsibility for risk mitigation in the name of achieving their marketing goals.
The insurance industry prefers married drivers with high credit scores, because when insurers look at the high-credit, married driver, they see multiple cars to cover, a home to insure, a life insurance policy to sell, maybe even boat insurance and an account with the company’s bank affiliate. When they see a widow with a low credit score all they see is someone who will buy the basic auto coverage required by law. So the pricing signal is meant to attract the profit opportunity, at the expense of an average Joe or Jane who just needs to get the basic coverage, even if both drivers have great records.
The problem with this, of course, is that all drivers, regardless of their love life or credit history have to buy coverage under Louisiana law. Allowing companies to use these unrelated algorithms, like credit score-based pricing sends entirely the wrong signal.
When it comes to the legislation being considered in Baton Rouge, the insurance companies are not in favor of reforms – like one to end the use of credit history in pricing – that would strengthen incentives for consumers to improve their driving in order to lower the risk of accidents across the state. The industry proposals skips over the idea of reducing the actual number of accidents and focuses on just making it harder for people injured in accidents to get their claim paid. Insurance companies don’t really care if accidents go down, as long as the number of claims filed for those accidents go down.
When state Sen. Rick Ward III, for example, recently questioned lobbyists about why insurers’ use drivers’ credit history, they argued that credit history is an indicator of the “likelihood of filing a claim.”
We can, for the moment, put aside the fact that the industry lobbyists offering up this excuse provided no supporting data. And we can also set aside the strange argument that people should be punished because their credit score suggests they will abide by their insurance contract and file a claim if they have an accident.
Let’s instead focus on the massive hole in this argument. If credit history is, as they say, a way to guess the likelihood of a customer filing a claim, then it would only apply to coverages that could lead to a claim. But insurers charge a much higher rate even to lower credit drivers who are buying only the basic liability coverage to comply with state law. A driver can never file a claim under that policy, because the policy only covers claims by others, for which you are liable.
In other words, every driver, regardless of their credit score, has a 0% chance of filing a claim under their own liability policy, but the insurance companies don’t let that fact get in the way of their premium hikes.
The lesson is that insurers and their lobbyists will say just about anything to explain why companies want widows to pay more or for people with financial stress to face higher premiums. And, so far, it seems that Insurance Commissioner Donelon is not going to do anything about it.
So, that puts the problem of unfair auto insurance pricing squarely in the hands of the legislature, especially those conservative members who have told constituents that reducing premiums is a top priority yet have, thus far, championed profits over people.