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Giving Americans Cheap Car Insurance Without Bankrupting Insurance Companies Is Easier Than You Think

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Looking for cheap car insurance? You're not alone, and you haven't been for a long time.

On Tuesday, a report by the Consumer Federation of America showed that average auto insurance premiums have jumped 13.7% in Hawaii (the smallest increase) to 108% in Nebraska (the largest increase) over the past 25 years, despite gains in safety by car manufacturers, efforts by municipalities to build safer road infrastructures, and consumer emphasis on safe driving practices. This increase is almost across the board, occurring in 49 out of 50 states. The only state that has seen a decline in auto insurance premiums is California at -0.3%.

I spent the summer in L.A. and experienced the infamous bumper-to-bumper traffic up and down the western coast of the state. Everyone in California drives, so why are auto insurance premiums dropping there of all places? Isn't risk higher with more vehicles on the road and shouldn't that drive up premiums?

The answers to these questions lie deep within the algorithm that auto insurance companies use to set rates. All is not fair in the world of auto insurance, except in California where consumers have saved a whopping $100 billion plus in insurance premiums as a result of pro-consumer insurance regulations instituted in 1989.

It's expensive to be poor

While most consumers know that FICO scores have a direct effect on our ability to get financing for various types of lending, and the interest rates associated with those loans, most consumers don't realize that FICO scores have a strong influence on other areas of our financial life. For example, FICO scores affect all types of insurance premiums in most states. The great exception to that rule is auto insurance in California because California outlawed discriminatory practices against low- and middle-income consumers, as well as minority consumers.

Rules need regulation

Rules are only as good as the regulations that surround and support them. Our lives are filled with a wide variety of legal protections against discrimination in employment, lending, housing, elections, and college admissions to name just a few. However, society needs a fair and just system that allows consumers to register complaints and open inquiries into suspicious practices. Governments must commit to thoroughly and systematically reviewing these cases and instituting course corrections when it does find evidence of foul play.

Ralph Nader and other progressive activists led the charge that put Proposition 103 on the ballot in California in November 1988. A very small majority of voters – 51.3% – approved the proposition. Proposition 103 encompasses a small and vital handful of basic principles related to car insurance premiums. Car insurance premiums must primarily be set by the following factors in California:

  1. The number of years of experience as a driver;
  2. The safety record of the driver during those active driving years; and
  3. The average number of miles driven each year by the driver.

Additionally, insurers are strictly prohibited from using a "thin file" excuse; in other words, new drivers cannot be penalized for the absence of a prior policy. (This "thin file" rationalization is a common rate-setting practice by credit card issuers and banks that make consumer loans.)

The possible consumer gains in the other 49 states

Sit down before reading this bit: if the other 49 states put these California-born initiatives in place to regulate auto insurance premiums, consumers would collectively save $350 billion over the next 10 years.

And here's the biggest kicker – even with these regulations and benefits to consumers, insurance companies that offer these policies will maintain a reasonable amount of profitability. These reforms don't rob insurance companies for the sake of consumers. They merely balance the current outrageously lopsided scale of financial benefit in the auto insurance industry.

If ever there was a consumer advocacy campaign that we should get behind, that every progressive politician should endorse and support, this is it. This is a social, economic, and political issue that is predicated on nothing more than fairness. Armed with this comprehensive report from the Consumer Federation of America, it's only a matter of time before we see massive innovation and consumer-driven disruption in the auto insurance industry. Some ingenious and informed entrepreneur is surely going to swoop in and shake up this market. 

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Read/Post Comments (4) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 14, 2013, at 4:28 PM, NoVaEarly wrote:

    With 20 years of driving experience, I have a perfect driving record, excellent credit, use public transit to go to and from work so my cars are not driven 4-5 days out of the week and have never filed an insurance claim. I even pay for rock chips in my windshields out of pocket. Despite these facts my auto insurance has gone up every time I bought a new car or moved, even into gated communities where there is very little risk of a claim and several times with no factors changing other than the insurance company wanted to make more money. Insurance companies should be forced to work more like a credit union. 1) I pay my premium. 2) You invest some of it in other markets and spend the rest to cover other people’s claims. 3) You bring in more than you pay out through your investments and premiums paid. 4) You keep enough to keep the lights on, and 5) Customers get a percentage of their premium/your profits back. Those with tickets get a little less back. Those that took driver improvement courses get a little more. Seems perfectly reasonable to me. Allstate has a policy close to that, but not even that goes far enough. If I had chosen to not have insurance and instead took my chances and but that money in a bank account paying just 1 percent, I would have had enough to pay cash for my last car. I have gotten absolutely nothing back other than peace of mind, maybe. That is wrong.

  • Report this Comment On November 15, 2013, at 5:04 AM, GETRICHSLOW2 wrote:

    I highly recommend GIECO.

  • Report this Comment On November 15, 2013, at 9:21 PM, SoCalFool wrote:

    NoVayEarly I too could have almost paid for my last car cash if I put the money I spent on car insurance in the bank instead. But you know it's a good thing I didn't because last year I had an accident which paid my policy limit of $500,000 for bodily injuries and $35,000 in property damage and another $45,000 for my car that got totaled. That's $580,000 they paid on my behalf. The same thing happened to my neighbor also with similar payouts. So I'd say my car insurance has been the best investment I've ever made since I pay about $2,000 yr for it. The insurance company has to collect a lot of $2,000 policies to break even on over the 1 mil my neighbor and I have cost them.

  • Report this Comment On November 30, 2013, at 2:00 PM, Christanyc wrote:

    Thank you all for sharing your stories and recommendations. Hopefully the rest of the country will take its lead from California when it comes to auto insurance.

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