The Louisiana property insurance market has been deteriorating since the state was hit by a record level of hurricane activity during the 2020/2021 seasons, Triple-I says in a new Issues Brief on the state’s insurance crisis. Twelve insurers that write homeowners coverage in Louisiana were declared insolvent between July 2021 and February 2023.
“While similarities exist between the situations in these two hurricane-prone states, the underlying causes of their insurance woes are different in important ways,” said Mark Friedlander, Triple-I’s director of corporate communications. “Florida’s problems are largely rooted in decades of litigation abuse and fraud, whereas Louisiana’s troubles have had more to do with insurers being undercapitalized and not having enough reinsurance to withstand the claims incurred during the record-setting hurricane seasons of 2020 and 2021.”
Insurers have paid out more than $23 billion in insured losses from over 800,000 claims filed from the two years of heavy hurricane activity. The largest property loss events were Hurricane Laura (2020) and Hurricane Ida (2021). The growing volume of losses also drove a dozen insurers to voluntarily withdraw from the market and more than 50 to stop writing new business in hurricane-prone parishes.
This is not to say legal system abuse is absent as a factor in the Louisiana’s crisis – quite the opposite, as highlighted by Insurance Commissioner Jim Donelon’s cease-and-desist order, issued in February, against a Houston-based law firm. According to Donelon, the firm filed more than 1,500 hurricane claim lawsuits in Louisiana over the span of three months last year.
“The size and scope of McClenny, Moseley & Associates’ illegal insurance scheme is like nothing I’ve seen before,” Donelon said. “It’s rare for the department to issue regulatory actions against entities we don’t regulate, but in this case, the order is necessary to protect policyholders from the firm’s fraudulent insurance activity.”
McClenny Moseley has since been suspended from practice in Louisiana’s Western District federal court over its work on Hurricane Laura insurance cases.
A regular on the American Tort Reform Foundation’s “Judicial Hellholes” list, Louisiana’s “onerous bad faith laws contribute significantly to inflated claims payments and awards,” according to a joint paper published by the American Property Casualty Insurance Association (APCIA), the Reinsurance Association of America (RAA), and the Association of Bermuda Insurers and Reinsurers (ABIR).
“Insurers who fail to pay claims or make a written offer to settle within 30 days of proof of loss may face penalties of up to 50 percent of the amount due, even for purely technical violations,” the paper notes. “To avoid incurring these massive penalties, which are meted out pursuant to highly subjective standards of conduct, insurers sometimes feel compelled to pay more than the actual value of claims as the lesser of two evils.”
As a result of these converging contributors, Louisiana Citizens Property Insurance Corp. – the state-run insurer of last resort – has grown from 35,000 to 128,000 policyholders over the past two years, according to the Louisiana Department of Insurance.
Florida is one of the least affordable states for personal auto insurance, according to a new study by the Insurance Research Council (IRC). Claims trends are pushing premium rates up nationwide, and Florida is being hit particularly hard.
In 2020, the average expenditure for auto insurance was $1,342 in Florida, more than 30 percent higher than the national average, the IRC report says, citing data from the National Association of Insurance Commissioners (NAIC). In terms of affordability, IRC says, auto insurance expenditures were 2.39 percent of the median household income for the state. Only Louisiana was less affordable.
“Efforts to improve auto insurance affordability must begin with the underlying cost drivers,” the IRC report says. In nearly every of these categories, Florida costs are well above the national average:
Accident frequency: The number of property damage liability claims per 100 insured vehicles in Florida is 10 percent above the national average.
Repair costs: For years, the average cost of a property damage claim in Florida was below the national average. However, evidence suggests repair costs are increasing faster in Florida than elsewhere.
Injury claim relative frequency: Floridians show a greater propensity to file injury claims once an accident occurs, with a relative claim frequency 40 percent higher than the national average. Florida is the only no-fault state with an above-average ratio of bodily injury to property damage claim frequency.
Injury claim severity: The median amount paid per claim for auto injury insurance claims for all injury coverages combined is much higher in Florida.
Medical utilization: Florida auto claimants are more likely than those in other states to receive diagnostic procedures, such as magnetic resonance imaging (MRI).
Attorney involvement: Florida claimants are more likely to hire attorneys. Attorney involvement has been associated with higher claim costs and delays in settlement time.
Fraud and buildup: The percentage of all auto injury claims with the appearance of claim fraud and/or buildup is evidence of Florida’s culture of fraud.
Uninsured motorists: Florida has one of the highest rates of uninsured motorists, both a symptom and a cause of affordability challenges.
Litigation climate: According to a survey of business leaders, Florida’s legal environment ranks near the bottom of state liability systems in terms of fairness and reasonableness.
“Unique features in Florida’s insurance system and a long‐standing culture of claim and legal system abuse have allowed some medical and legal professionals to generate substantial income for themselves at a significant cost to Florida drivers,” said Dale Porfilio, IRC president and Triple-I chief insurance officer. Triple-I and IRC are both affiliated with The Institutes.
Policymakers in the Sunshine State enacted substantial property insurance reform in late 2022 to address the affordability and availability crisis in homeowners’ insurance and pledged to tackle similar issues in other lines of insurance to ease the financial burden that paying for auto insurance represents for Florida drivers.
Bills being addressed by the state’s Senate and House focus on significant tort reform to stop lawsuit abuse, including the elimination of one-way attorney fees for litigated auto claims and abolition of assignment of benefits for auto insurance claims — a generator of fraud and litigation. One-way attorney fees allow drivers who successfully sue their insurer to recoup attorney fees – but not the other way around.
As more new vehicles become equipped with crash-avoidance features, some owners report significant issues with the technologies after repairs, according to a recent report from the Insurance Institute of Highway Safety (IIHS).
In the survey, approximately half of those who reported an issue with equipped front crash prevention, blind-spot detection, or rearview or other visibility-enhancing cameras said at least one of those systems presented problems after the repair job was completed.
Nevertheless, many owners remained eager to have a vehicle with these features and were pleased with the out-of-pocket cost, according to Alexandra Mueller, IIHS senior research scientist.
“These technologies have been proven to reduce crashes and related injuries,” Mueller said. “Our goal is that they continue to deliver those benefits after repairs and for owners to be confident that they’re working properly.”
Still, as problems with these technologies persist, the study notes that it is important to track repair issues to further the adoption of crash avoidance features. IIHS research has shown that front-crash prevention, blind-spot detection, and rearview cameras all substantially reduce the types of crashes they are designed to address. For example, IIHS said, automatic emergency braking reduces police-reported rear-end crashes by 50 percent.
An analysis conducted by the IIHS-affiliated Highway Loss Data Institute (HLDI) showed the reduction in insurance claims associated with Subaru and Honda crash-avoidance systems remained essentially constant, even in vehicles more than five years old. But repairs can make it necessary to calibrate the cameras and sensors that the features rely on to work properly, making repairs complicated and costly.
For example, a simple windshield replacement can cost as little as $250, while a separate HLDI study found vehicles equipped with front crash prevention were much more likely to have glass claims of $1,000 or more. Much of that higher cost is likely related to calibration.
The new IIHS study found that owners often had more than one reason requiring repairs to these safety features. Most had received a vehicle recall or service bulletin about their feature, but that was rarely the sole reason they brought their vehicles in for service or repair.
“Other common reasons — which were not mutually exclusive — included windshield replacement, crash damage, a recommendation from the dealership or repair shop, and a warning light or error message from the vehicle itself,” according to the study.
Repair difficulties could motivate drivers to turn off crash avoidance features, potentially making collisions more likely. But, despite the post-repair issues, the study found that slightly more than 5 percent of owners would opt not to purchase another vehicle with the repaired feature. As reckless driving and traffic fatalities continue to rise, advanced driver-assistance systems will only become more important for the roadway safety, necessitating reliable technology.
Florida Gov. Ron DeSantis’s proposed insurance fraud and legal system abuse reforms, announced this week for consideration during the legislative session that begins in March, would build on measures approved in the closing weeks of 2022 and go a long way toward fixing the state’s insurance crisis.
Legislation passed during the 2022 special session eliminated one-way attorney fees and assignment of benefits (AOB) arrangements for property insurance claims. Gov. DeSantis’s proposal would go further, eliminating these mechanisms and “attorney fee multipliers” for all lines of insurance.
“For decades, Florida has been considered a judicial hellhole due to excessive litigation and a legal system that benefitted the lawyers more than people who are injured,” DeSantis said in his announcement. “We are now working on legal reform that is more in line with the rest of the country and that will bring more businesses and jobs to Florida.”
Before the 2022 reforms, state law required insurers to pay the fees of homeowners insurance policyholders who successfully sued over claims, while shielding policyholders from paying insurers’ attorney fees when the policyholders lose. The legislation also eliminated AOBs – agreements in which property owners sign over their claims to contractors, who then work with insurers.
AOBs are a standard practice in insurance, but in Florida this consumer-friendly convenience has long served as a magnet for fraud. The state’s legal environment – including some of the most generous attorney-fee mechanisms in the country – has encouraged vendors and their attorneys to solicit unwarranted AOBs from tens of thousands of Floridians, conduct unnecessary or unnecessarily expensive work, then sue insurers that deny or dispute the claims.
As a result, Florida accounts for nearly 80 percent of the nation’s homeowners’ insurance lawsuits, but only 9 percent of claims, according to the state’s Office of Insurance Regulation.
Eliminating these two mechanisms for property claims addresses much of the insurance fraud in the state. Eliminating them for all lines would be a promising sign that the state is truly committed to addressing the root causes of the crisis.
Florida’s insurance crisis didn’t happen overnight, and it will take years for the impacts of fraud and legal system abuse to be wrung out of the system. Policyholders won’t see premium benefits any time soon. Job 1 is to “stop the bleeding” as insurers fail, leave the state, or stop writing critical personal lines coverages like auto and homeowners.
Triple-I has published a new Issues Brief about the crisis and the state’s efforts to repair it.
Legislation being considered in Illinois underscores the need for legislators and other policymakers to become better educated about the importance of risk-based pricing and how it works.
The Motor Vehicle Insurance Fairness Act would bar insurers from considering nondriving factors, such as credit scores, when setting premium rates. The prohibitions include factors that actuaries have demonstrated correlate strongly with the likelihood of a driver eventually submitting a claim, as well as ones insurers already are prohibited from using.
This suggests a lack of understanding about risk-based pricing that is not isolated to Illinois legislators – indeed, similar proposals are submitted from time to time at state and federal levels.
Confusion is understandable
Risk-based pricing means offering different prices for the same coverage, based on risk factors specific to the insured person or property. If policies were not priced this way, lower-risk drivers would subsidize riskier ones. Charging higher premiums to higher-risk policyholders helps insurers underwrite a wider range of coverages, improving both availability and affordability of insurance.
The concept becomes complicated when actuarially sound rating factors intersect with other attributes in ways that can be perceived as unfairly discriminatory. For example, concerns are raised about the use of credit-based insurance scores, geography, home ownership, and motor vehicle records in setting home and car insurance premium rates. Critics say this can lead to “proxy discrimination,” with people of color in urban neighborhoods being charged more than their suburban neighbors for the same coverage.
Confusion is understandable, given the complex models used to assess and price risk. To navigate this complexity, insurers hire actuaries and data scientists to quantify and differentiate among a range of risk variables while avoiding unfair discrimination.
Appropriate protections are in place
It’s important to remember that insurers don’t make money by notinsuring people. They are in the business of pricing, underwriting, and assuming risk.
Because of the critical role insurers play in facilitating commerce and protecting the lives and property of individuals, insurance is one of the most heavily regulated industries on the planet. To ensure that sufficient funds are available to pay claims, regulators require insurers to maintain a cushion called policyholder surplus.
Credit rating agencies, such as Standard & Poor’s and A.M. Best, expect insurers to have surpluses exceeding what regulators require to keep their financial strength ratings. A strong financial strength rating enables insurers to borrow money at favorable rates – further promoting insurance availability and affordability.
On top of these constraints, state regulators have the authority to limit the rates insurers can charge within their jurisdictions.
No profit, no insurers — no insurers, no coverage
Like any other business, insurers must make a reasonable profit to remain solvent. Because they can’t just move money around as more lightly regulated industries can, the only way to generate underwriting profits is through rigorous pricing and expense and loss controls. Insurers don’t want to overcharge and send consumers shopping for a better price, or undercharge and experience losses that erode their ability to pay claims.
In this context, it’s important to note that personal auto and homeowners insurance premium rates have remained relatively flat as inflation and replacement costs have soared through the pandemic and supply-chain issues related to Russia’s invasion of Ukraine (see chart below).
During this period, writers of these coverages have struggled to turn an underwriting profit. Personal auto has been a primary driver of the overall industry’s weak underwriting results. Dale Porfilio, Triple-I’s chief insurance officer, recently said the 2022 net combined ratio for personal auto insurance is forecast at 111.8, 10.4 points worse than 2021 and 19.3 points worse than 2020. Combined ratio represents the difference between claims and expenses paid and premiums collected by insurers. A combined ratio below 100 represents an underwriting profit, and one above 100 represents a loss.
Even as inflation moderates, loss trends in both of these lines – associated with increased accident frequency and severity in auto and extreme-weather trends in homeowners and auto – will require premium rates to rise. The question is: Will the cost fall evenly across all policyholders, or will rates more accurately reflect policyholders’ risk characteristics?
Protected classes
The United States recognizes “protected classes” – groups who share common characteristics and for whom federal or state laws prohibit discrimination based on those traits. Race, religion, and national origin are most commonly meant when describing protected classes in the context of insurance rating, and insurers generally do not collect information on these “big three” classes. Any discrimination based on these attributes would have to arise from using data that might serve as proxies for protected classes.
Algorithms and machine learning hold great promise for ensuring equitable pricing, but research shows these tools can amplify implicit biases.
The insurance industry has been responsive to such concerns. For example, recent Colorado legislation requires insurers to show that their use of external data and complex algorithms does not discriminate against protected classes, and the American Academy of Actuaries has offered extensive guidance to the state’s insurance commissioner on implementation. The Casualty Actuarial Society also recently published a series of papers (see links at end of post) on the topic.
Correlation matters
Certain demographic factors have been shown to correlate with increased risk of submitting a claim. Gender and age correlate strongly with crash involvement, as the National Highway Traffic Safety Administration (NHTSA) data illustrated at right shows.
Likewise, National Association of Insurance Commissioners (NAIC) data below clearly shows higher credit scores correlate strongly with lower crash claims.
Similar correlations can be shown for other rating factors. It’s important to remember that no single factor is determinative – many are used to assess a policyholder’s risk level.
Consumers “get it” – when it’s explained to them
A recent study by the Insurance Research Council (IRC) found consumer skepticism about the connection between credit history and future insurance claims appears to decline when the predictive power of credit-based insurance scores is explained to them. Through an online survey with more than 7,000 respondents, IRC found that:
Nearly all believe it is important to maintain good credit history, and most believe it would be “very” or “somewhat” easy to improve their credit score;
Consumers see the link between credit history and future bill paying but are less confident about the link between credit history and future insurance claims.
After reading that many studies have demonstrated its predictive power, most agree with using credit-based insurance scores to rate insurance, especially for drivers with good credit who could benefit.
If consumers “get it” when you share the data with them, perhaps policymakers and legislators can, too.
Florida legislation proposed last week would prevent the state’s motorists from assigning their legal rights in auto insurance claims to repair shops.
Assignment of benefits (AOB) is a standard practice in the insurance world. In Florida, however, this efficient, customer-friendly way to settle claims has long served as a magnet for fraud. The state’s legal environment has encouraged vendors and their attorneys to solicit unwarranted AOBs from tens of thousands of Floridians, conduct unnecessary or unnecessarily expensive work, then file tens of thousands of lawsuits against insurers that deny or dispute the claims.
Legislation approved in the closing weeks of 2022 took several crucial steps toward resolving the state’s property/casualty insurance crisis, including elimination of the state’s AOB laws with respect to property claims. But it didn’t affect auto-related AOBs.
Intended to help consumers
Florida’s auto glass law – originally intended to encourage drivers to repair or replace damaged windshields by prohibiting insurers from charging deductibles for windshield damage – is being exploited by glass-repair shops all over Florida. Unscrupulous vendors hire workers to canvas neighborhoods, enticing vehicle owners to sign up for “free” windshield replacements. They get car owners to sign an AOB contract that assigns the owners’ legal rights to the repair shop.
The shop then can sue the consumer’s insurer if it doesn’t pay what the shop demands. The result is a lawsuit by the vendor in the consumer’s name.
Lawyers have a strong incentive to file suits, as the insurer is required to pay their fees if it loses in court. This has resulted in a “sue-to-settle” system, in which lawyers file suits over very small disputes to force a settlement.
Hope for the future
“What began as a small regional issue a decade ago with a few lawyers and some auto repair shops has blown up to become a major problem throughout the state,” said Mark Friedlander, Triple-I’s director of corporate communications and a Florida resident. Between 2011 and 2021, the number of auto glass lawsuits in Florida rose more than 4,000 percent, from 591 to more than 28,000. A National Insurance Crime Bureau (NICB) analysis found that Florida had the highest number of questionable auto-glass claims among the 50 states in 2020.
WhileFlorida is a “no-fault” state – meaning both parties in an accident submit claims to their own insurer, regardless of fault – it ranks high for attorney involvement in accident claims, the Insurance Research Council (IRC) has found. Attorney involvement is associated with higher costs, and IRC also has found Florida to be among the least affordable auto insurance markets.
The new measure, filed for the 2023 legislative session that starts March 7, offers hope that Florida is finally serious about solving the decades-old mechanisms that have fed the state’s current insurance crisis. Taken together, the two pieces of legislation will help stabilize Florida’s insurance market, but it will take years for the impacts of fraud and legal system abuse to be wrung out of the system.
Three anti-crime organizations have asked YouTube to take down all videos that teach people how to steal Kia and Hyundai automobiles. The organizations – the National Insurance Crime Bureau (NICB), the Coalition Against Insurance Fraud, and the International Association of Special Investigation Units (IASIU) – made their request in response to a spike in thefts of these vehicles.
The Highway Loss Data Institute (HLDI) late last year reported that bargain-priced Kia and Hyundai vehicles were being targeted for theft at rates similar to muscle cars and SUVs, based on an analysis of 2021 insurance claims. The spike is due, in part, to the fact that the models being stolen don’t have electronic immoblizers that stop thieves from bypassing the ignition.
Some thieves have even made instructional videos – shared on platforms like YouTube and TikTok – on how to perform the theft procedure using just a screwdriver and a USB cable. Since these videos started appearing on social media, police departments across the U.S. have reported drastic increases in Kia and Hyundai thefts.
In Chicago, for example, where only 328 Kias were stolen in 2021, more than 3,500 were stolen last year, CBS Chicago reported.
“Everyday consumers are being victimized by criminals using social media platforms to learn their newest illegal tricks and techniques,” said David Glawe, president and CEO of the NICB. “Some platforms are not doing enough to protect innocent victims from unnecessary harm.”
Celeste Dodson, president of IASIU, added, “When a vehicle is stolen, it is often not the end of the crime but the beginning. Vehicle thefts are associated with a multitude of criminal activity, including insurance fraud. The cost of these crimes is then passed on to consumers through higher premiums.”
Private-passenger auto insurance premium rates are experiencing upward pressure due to a variety of factors, including:
Rising insurer losses due to increasing accident frequency and severity;
More fatalities and injuries on the road, leading to increased attorney involvement in claims;
Continuing supply-chain issues, leading to rising costs for cars, replacement parts, and labor; and
More costly auto repairs due to safer, more technologically sophisticated vehicles.
Thefts of vehicles or components like catalytic converters only increase that pressure to raise rates.
The only way to turn that pressure down is to reduce claims and losses by reducing accidents and thefts. Making it harder for people to learn how to break the law and cause damage by watching online videos would be a small but needed step in that direction.
Rising thefts of catalytic converters – driven, at least in part, by increased black-market prices for the motor vehicle pollution-control component – have prompted renewed state and federal focus on stopping these crimes.
Converter thefts rose in 2021, with 52,206 reported, up from 1,298 in 2018, according to claims data from the National Insurance Crime Bureau (NICB). Catalytic converters are part of a vehicle’s exhaust system, reducing toxic gas and pollutants and turning them into safe emissions. Though the part itself is valuable—sometimes rising above $1,000 each on the black-market—the precious metals inside can be more valuable than gold. They include palladium, platinum, and rhodium, the latter of which is valued at $20,000 per ounce.
The NICB has found a strong link between “times of crisis, limited resources, and disruption of the supply chain that drives these thefts.”
In late 2022, the U.S. Department of Justice, alongside federal, state, and local law enforcement partners, broke up a network of thieves, dealers, and processors involved in selling stolen catalytic converters to a metal refinery for tens of millions of dollars. The ring spanned nine states, from California to Virginia. The United States is now pursuing forfeiture of $545 million connected to the case.
“This national network of criminals hurt victims across the country,” said FBI Director Christopher Wray. “They made hundreds of millions of dollars in the process—on the backs of thousands of innocent car owners.”
Lawmakers take notice
In 2021, 26 states across the U.S. proposed bills to limit the theft of catalytic converters. Stringent laws in Arkansas, South Carolina, and Texas require scrap metal buyers to maintain records of catalytic converter purchases. In Minnesota, a Catalytic Converter Theft Prevention Program was created for investigation and prosecution of this crime.
More recently, U.S. Rep. Jim Baird of Indiana introduced a federal “Preventing Auto Recycling Theft Act,” which would help law enforcement address these thefts by marking each converter with a traceable identification number and establishing federal penalties.
“Whoever steals or knowingly and unlawfully takes, carries away, or conceals a catalytic converter from another person’s motor vehicle, or knowingly purchases such a catalytic converter, with the intent to distribute, sell, or dispose of such catalytic converter or any precious metal removed therefrom in interstate or foreign commerce shall be fined under this title or imprisoned not more than 5 years, or both,” the legislation says.
Companion legislation has been introduced in the Senate by Sen. Amy Klobuchar of Minnesota and Ron Wyden of Oregon.
Preventive measures can be taken
The NICB recommends several steps to protect yourself from catalytic converter thefts:
Install a catalytic converter anti-theft device.
Park fleet trucks in an enclosed area that is secured, well lighted, locked and alarmed.
Park personal vehicles, if possible, in a garage. If not possible and the vehicle must be parked in a driveway, consider installing motion sensor security lights. Whether in the garage or outside in the driveway, set the alarm on your vehicle if equipped.
Attend a local NICB catalytic converter etching event. If none are currently scheduled in your area, contact a muffler shop that can etch your vehicle’s VIN on the converter, and spray it with a highly visible high-heat paint.
The NICB notes that these thefts can be covered by insurance under the optional comprehensive portion of your insurance policy, which provides coverage for damage to your vehicle not caused by a collision.
Insurance groups argue that new laws in California and New Jersey that raise the minimum auto liability coverage required for drivers may cause price-sensitive consumers to drop their coverage.
The law in California, signed by Gov. Newsom in October, raises the minimum liability coverage to $30,000 per single injury or death, from $15,000; $60,000 per accident, from $30,000; and $15,000 for property damage, from $5,000. These changes are effective January 1, 2025
The New Jersey law, signed in August 2022 by Gov. Murphy, raises the limits in two steps: first to $25,000 per injury, $50,000 per accident and $25,000 for property damage effective on January 1, 2023 and then to $35,000 per injury and $70,000 per accident on January 1, 2026. Coverage for property damage will remain unchanged for the second increase.
To better understand the impact this will have on insurers and consumers, we sat down with Gary R. La Spisa, II, vice president, Insurance Council of New Jersey, and Janet Ruiz, Triple-I’s director of strategic communications, who specializes in the California insurance landscape.
Why are these laws being passed now?
La Spisa: While the ICNJ understood the need for, and ultimately supported, a move from our current minimums of 15/30/5 to the next currently filed level of 25/50/25 to keep up with average losses, we advocated against imposing a second state-mandated premium increase on drivers with minimum limits.
Ultimately, 1.36 million drivers in New Jersey will face at least one premium hike as a result of the law, at an estimated $130 annual increase. Unfortunately, we cannot estimate the impact of the second hike, as limits of 35/70/25 are not filed in any state.
Ruiz: We’ve seen medical and repair costs increase dramatically and an increase in accidents and fatalities now that pre-pandemic numbers of drivers are back on the road. While inflation, supply-chain issues and litigation costs are on the rise, we are concerned that this will cause drivers who can’t afford increased limits to drop coverage
What are the consequences of consumers dropping coverage?
La Spisa: Presently, the uninsured motorist rate in New Jersey is estimated to be the lowest in the nation, at 3.1 percent. We are concerned that some drivers will drop coverage, which will push this number up and force carriers to increase rates for uninsured/underinsured motorist coverage.
Ruiz: Consumers who drop coverage risk losing their driver’s license, fines, and inability to register their car with the DMV. California now has the highest number of uninsured drivers in the U.S., estimated at 3.6 to 4.1 million people.
What other effects do you anticipate?
La Spisa: New Jersey law offers a bare bones insurance product, which we refer to as the Basic Policy. We expect that as affordability becomes a greater concern some drivers will opt for this limited product, instead of a full Standard Policy.
Ruiz: California law also offers a bare bones, low-cost auto insurance product, which may get more takers as we face affordability issues for low-income drivers. The state is expecting fewer underinsured accidents due to the higher limits. We expect to see more drivers in the low-cost auto program and litigation for higher verdict awards for those who have the higher limits.
Do you believe this will have a ripple effect on other states?
La Spisa: Perhaps. The challenge is striking a balance between adequate coverage and affordable premium so to avoid pricing drivers out of insurance all together.
Ruiz: Many states have already increased the minimum liability limits and may not make changes.
How are insurers responding to these price hikes, or planning to?
La Spisa: Most companies already have a 25/50 bodily injury and a $25,000 property damage product filed in New Jersey, so the impact of the first increase on carriers is primarily on the administrative and IT front as they reprogram their systems and renew policyholders with current minimums at the new standard.
For the second increase, carriers will have significant work to do, including determining pricing for this new limit which does not exist anywhere in the country and filing this new product with the Department before rolling it out.
Ruiz: Insurers will adapt to the new law. Many are reluctant, due to the affordability issues for low-income drivers.
What can consumers do to deal with these increased costs?
La Spisa: Consumers should carefully review their policies and always consider shopping around to find the policy which best fits their needs and budget.
Ruiz: We recommend that people shop and compare. Ways to save include choosing higher deductibles, bundling home and auto insurance, or dropping comprehensive or collision insurance on older cars with low value.
Consumer skepticism about the connection between credit history and future insurance claims appears to decline when the predictive power of credit-based insurance scores is explained to them, a recent study by the Insurance Research Council (IRC) suggests.
This is just one of the IRC’s encouraging findings. Others include:
Consumers are generally knowledgeable about credit, credit histories, and credit scores.
Nearly all believe it’s important to maintain good credit history, and most believe it would be easy to improve their credit score.
Among nearly all demographic groups, paying for auto insurance is not considered a burden for most households.
Concerns have been raised about the use of credit-based scores and certain other metrics in setting home and car insurance premium rates. Critics say it can lead to “proxy discrimination,” with people of color – who are more likely to have less-than-stellar credit histories – sometimes being charged more than their neighbors for the same coverage.
Confusion around insurance rating is understandable, given the complex models used to assess and price risk, and insurers are well aware of the history of unfair discrimination in financial services. To navigate this complexity, they hire teams of actuaries and data scientists to quantify and differentiate among a range of risk variables while avoiding unfair discrimination.
As the chart below shows, insurance claims tend to decline as credit scores improve. The fact that race frequently correlates with lower credit scores highlights societal problems that must be addressed through public policy, including financial literacy education. If anything, apparent racial disparities in insurance availability or affordability related to credit quality lend force to arguments for policy change.
In a study published last year, nearly half of respondents said financial literacy education would have helped them manage their money better through the pandemic. The study, which surveyed 1,047 U.S. adults, found that 21 percent felt insurance was the subject they understood least.
While the IRC study found non-Hispanic Black respondents were more likely than other groups to say their credit scores were below average and that it was important to improve their scores and would be easy to do so, they also were less likely to believe credit is a reliable indicator of paying bills or filing claims. Similarly, they were less likely to say it was okay to use credit history in lending, renting, or insurance settings.
All ethnic and racial groups, however, agreed that a person who has maintained good credit should benefit in the form of lower insurance rates.
“Many studies have shown that credit-based insurance scores are predictive of claims behavior,” the IRC report says, adding that recent studies using driving data from telematics devices “show a link between specific driving behaviors, such as hard braking, and variations in credit-based insurance scores.”
Any rating factor that can predict losses and claims helps insurers fairly price insurance by charging individual drivers rates that closely align with their risk. In the absence of these factors, less risky drivers would pay higher rates to subsidize the insurance of more risky drivers.
