How more 'fair' car insurance pricing can backfire - Policygenius

When insurance companies aren’t allowed to consider factors like gender in underwriting, it can lead to unintended consequences.

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Myles Ma, CPFCSenior ReporterMyles Ma, CPFC, is a certified personal finance counselor and former senior reporter at Policygenius, where he covered insurance and personal finance. His expertise has been featured in The Washington Post, PBS, CNBC, CBS News, USA Today, HuffPost, Salon, Inc. Magazine, MarketWatch, and elsewhere.

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Insurance underwriting is essentially a form of price discrimination: Insurance companies charge different prices to different customers depending on their perceived risk of filing a claim. While pricing based on certain factors, like race, is banned, in auto insurance, variables like age, gender, and credit score can still affect how much you pay in most states. 

Sometimes drivers — and regulators — don’t like how insurers use these variables. California, Hawaii, Massachusetts, Michigan, North Carolina, and Pennsylvania ban the use of gender in setting car insurance rates. But these bans can have unintended consequences.

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The consequences of banning pricing variables

Car insurance rates are 6% higher on average for male drivers than female drivers of the same age, according to Policygenius data. 

Driver's gender

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Cost of full-coverage car insurance.

Women pay less because men tend to get into more car accidents and make more insurance claims. If regulators ban insurance companies from pricing based on gender, as they did in the six states mentioned above, the result is that women essentially get a price hike because they’ve been lumped in with a riskier group of drivers (men), even though they’re less likely to get into an accident. 

Dave Cather, clinical professor at Penn State and author of a new paper published in Risk Management and Insurance Review that explains how banning forms of price discrimination to protect some customers can lead to unfair outcomes for other customers, says young women face potentially the biggest price increases.

“That’s where the data indicates there’s the biggest difference between high-risk male and low-risk (female drivers),” Cather says.

As a result, young women may end up reducing their coverage or going without car insurance altogether because of the cost. 

Is there a fair way to price auto insurance?

Insurance companies have a difficult balance to achieve: One one hand, they want to charge the right price for each customer, and all those variables, including gender, help them determine how risky each person is. 

On the other hand, they don’t want to be accused of unfairly discriminating against protected classes. One way they can determine risk based purely on driving behavior is through telematics programs, which track your driving data, like how fast you go and how hard you brake. These programs, branded under company-specific names like Drivewise or Snapshot, can save drivers money — about $332 a year — but only if you actually drive safely. 

“Telematics gives you the ability to measure the true causes of auto accidents in a cost-effective way,” Cather says.

Most leading insurance companies offer a telematics product, and they’ve become increasingly popular, with customer participation doubling since 2016. Still, that amounts to only 17% of auto insurance customers. Cather attributes the slow takeup to privacy concerns.

“I also think there’s a lot of people who are interested in it but they’re not so dissatisfied with what they’re paying now,” he says.

But that may change with many drivers facing steep rate hikes thanks to inflation and supply chain disruptions. 

Reducing discrimination in life insurance

Unlike auto insurance, there’s no “silver bullet” solution to weeding out factors like gender in life insurance. 

“If you take a look at what gender is being used to measure in life insurance, it’s a bunch of stuff that’s really hard to measure,” Cather says.

Women tend to live longer than men, and men are at greater risk for factors like work stress, substance abuse, and lack of exercise. Some life insurance companies have tried encouraging tracking similar to that used in car insurance, for example by having customers share how many miles they run each week, but these programs haven’t caught on.

Genetic testing may allow life insurance companies to accurately measure mortality risk without relying on factors like gender, but some states have banned its use in insurance underwriting. 

Even with bans on certain factors, insurance companies can find other ways to price risk and still make money.

“It’s not like their hands are tied behind their backs,” Cather says, though he acknowledged that finding other ways to price risk could be costly. “They just have to develop other types of pricing data or rely on their models to change the weighting of how important the remaining pricing variables are if you take out gender.”

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