Auto Insurance

Auto Insurance Rates Make Little Sense, State Regulators Should Repair a Broken System

Washington, D.C. — The Consumer Federation of America (CFA) today issued a research paper that raises serious questions about the actuarial soundness of auto insurance rates being charged throughout the country. The paper can be viewed here.

The questions raised by CFA include:

  • Does the wide variation among large, standard insurance companies in the premiums charged to identical drivers raise actuarial soundness issues?
  • Do these rates, being extremely divergent for the identical risk, raise questions about market competition in auto insurance?
  • Does the variation in the price differentials between high and low economic status drivers – both among companies and within individual companies – raise questions of actuarial soundness of rating factors and pricing mechanisms?
  • Do the socioeconomic factors studied in the paper meet the actuarial standard of public acceptability?
  • Do these socioeconomic rating factors have a plausible relationship to risk or are they “obscure and irrelevant” and thus fail to meet actuarial standards?

“Auto insurance rates throughout the country make no sense,” said J. Robert Hunter, CFA’s Director of Insurance and former Chief Actuary and Administrator of the Federal Insurance Administration.  Hunter, who also served as Texas Insurance Commissioner, further stated, “Not only are many rates clearly not actuarially sound, the extreme dispersion of prices for identical risks means that market competition is not working to assure prices are reasonable.”

In the paper, CFA analyzed two sets of auto insurance premium data:

  • Rate quotes online for the five largest auto insurers in America, representing about half of the premium volume of the nation.
  • 293,010 quotes from 64 preferred and standard affiliates of Allstate, Farmers, GEICO, Progressive and State Farm in 29,664 ZIP codes (representing 99.4 percent of the US population).

“We found prices for the same coverage that were so wildly different as to be implausible if we believe that they all were developed according to actuarial standards,” said Douglas Heller, an insurance expert for CFA.  He pointed to examples such as the premiums for a high economic status female in Minneapolis, which ranged from $528 to $3,312 – a $2,784 or 527.3% increase in price – depending on whether she applied to GEICO or Farmers. “There is no reason that actuarially sound pricing methods would lead to such wildly different premium quotes for an identical, excellent driving risk purchasing the same minimum limits,” Heller stated.

Minneapolis was hardly the only city in which CFA found that the exact same driver faced premium quotes from these five insurers that diverged dramatically more than expected. The premium quotes to the same driver in a city differ by over 100% (double the rate) in more than two-thirds (41 of 60) of the customer profiles tested in the first analysis. They vary by more than 150% in 20 of 60 profiles, by over 200% (triple the rate) in 12 of 60 profiles and by more than 400% (quintuple the rate) in 5 of 60 tests.

To determine if the findings from the test of the leading five insurers was typical of a large data set, CFA undertook the second test, a review of 293,010 quotes from 64 preferred and standard affiliates of Allstate, Farmers, GEICO, Progressive and State Farm in 29,664 ZIP codes (representing 99.4 percent of the US population).  This research reveals the same wide variation in the market price as was demonstrated in CFA’s web quote tests, even after excluding non-standard insurers from the analysis.

Looking at premiums in the ZIP codes of the nation’s 50 largest metropolitan areas, representing 53% of the U. S. population – the average range of price variation within a ZIP code was $965, with the highest price being, on average, 210% above (more than triple) the lowest price for the same coverage in the ZIP code. Of the 8,188 ZIP codes (and 80,725 premium quotes) in the top 50 metro areas, the difference between the low and high prices was at least 100% (double) in 6,581 ZIP codes. Premiums varied by more than 500% in 537 ZIP codes, with an average range of $3,257 between the lowest and highest price for the same coverage in those markets.

What Should the States and Federal Government Do About This?

“The data detailed in this study are substantial but more study is needed to fix this broken system,” Hunter said. “Expanding the research would require using data on rates, claims, and losses that are not, generally, available to the public. Such research is clearly the responsibility of state insurance departments, which are compelled by state law to ensure actuarial soundness and prohibit excessive and unfairly discriminatory pricing in their state’s auto insurance market. This is particularly vital in the case of state-required auto insurance, since states mandate its purchase and penalize (with fines, license suspension, and even jail time in several states) any resident who fails to maintain coverage, even if that person clearly cannot afford it. The disparity in prices also raise serious questions as to the competitiveness of auto insurance markets, which is important because several states’ laws allow unregulated rates as long as the insurance market is deemed competitive.”

CFA sent requests to every state insurance commissioner that the commissioner undertake an actuarial review of the issues raised in our paper.  CFA also sent the paper to the Federal Insurance Office, requesting that it consider these data as it researches why auto insurance prices are often unaffordable for low- and moderate-income Americans, since these odd price disparities particularly impact this group of Americans.

What Triggered This Research? 

Since CFA first began research on auto insurance rates being charged to consumers across the country in 2011, the variation in prices and pricing practices has been notable and surprising. CFA has released 15 studies on auto insurance premium quotes, with a focus on the affordability of coverage for low- and moderate-income Americans.  While the reports were focused on one or another aspect of the insurance pricing, in study after study, CFA saw pricing for the exact same coverage that bounced around from company to company and state to state in ways that made no sense from an actuarial perspective.

CFA’s studies began to paint a picture of auto insurance premium patterns that made no sense if pricing was really aimed at reflecting the risk of the driver being quoted premiums by different insurers. Not only that, there was plenty of evidence that a single company would charge consumers premiums that varied in ways that suggested something other than risk of loss was being evaluated. For instance, one CFA report highlighted an insurer that identified gender as a major risk component in its rates. In one state, the company charged a female driver much less than an otherwise identical male driver. But, in a nearby state, the company deemed females a much higher risk than males, and charged women much higher premiums than men. If there were something inherently risk-related about the biological sex of a driver, it would not flip back and forth from place to place.

In light of these surprising and odd observations, CFA decided to conduct the research and analysis in the paper provided to the nation’s insurance commissioners and released today.

Contact: J. Robert Hunter, 207-864-3953; Doug Heller, 310-480-4170


The Consumer Federation of America is a national organization of more than 250 nonprofit consumer groups that was founded in 1968 to advance the consumer interest through research, advocacy, and education.