There's an interesting battle brewing in the insurance business, pitting Berkshire Hathaway
OK, maybe it's not a battle. It's more along the lines of a very weak argument and a lot of hoopla. Still, it's worth looking into. The CFA and NJ CURE's assertion says a lot about the risk-assessment policies of insurance companies and other businesses.
CFA and NJ CURE are calling on states to ban insurance practices that directly base eligibility and premiums solely on consumers' educational background and occupation. CFA claims that insurance companies like GEICO shouldn't be able to charge different rates to teachers, janitors, accountants, and salespeople based solely on their chosen profession and level of education.
The CFA argues that less-educated people are more likely to be ethnic minorities and to have lower-paying jobs. At first glance, the statistics they provide seem to back up this statement. By focusing solely on these two factors, the CFA believes that GEICO is skirting laws that prohibit pricing insurance based on race and income.
The CFA and NJ CURE also provide records of different quotes that received from GEICO for policies, based solely on a difference in education and profession. Since CFA and NJ CURE didn't provide quotes that test any other variables, it's only possible to conclude from their data that GEICO does use education and occupation in its analysis -- not that those are the only factors it uses.
I've got a real problem with the CFA and NJ CURE's conclusion and the data used to reach it. Plenty of Americans of every ethnicity have lower levels of education, lower-paying jobs, or both. There's no shortage of folks working low-wage jobs despite holding bachelor's and master's degrees, as well as plenty of successful earners who lack higher education. The consumer advocacy groups' data just doesn't support their conclusion that GEICO's use of employment and education is an attempt to skirt anti-discrimination laws.
Let's be clear: Any pricing based entirely on race or income is doomed to fail. Not only is it morally wrong, but I also think it's a pretty stupid and unprofitable way to run a business. I own shares in Berkshire Hathaway, and I have a hard time believing that the company would pursue such a boneheaded strategy.
The CFA argues that companies shouldn't be allowed to focus solely on employment and education. Judging from GEICO's underwriting guidelines, which the CFA and NJ CURE provided to the National Association of Insurance Commissioners (NAIC) -- sorry, folks, one more abbreviation -- I have a very hard time believing that GEICO is doing so. In its guidelines, GEICO lists multiple items specific to driving history, the driver, and the vehicle or number of vehicles being insured. Driving history is the first criterion evaluated. In fact, only one item cites occupation, and it's one of 11 subheadings under the "driver" category. Does that sound like a deciding factor to you?
The CFA and NJ CURE's allegations raise some interesting questions about other lines of business where risk is assessed. While the advocacy groups are only targeting insurance at the moment, and GEICO specifically, it's not a large leap to other industries. What about people with lower incomes having to make an up-front deposit in order to get phone, electrical, and cable service from the likes of Verizon
Having read the entire letter and supplements that were sent to the NAIC, and multiple articles covering this story, I feel more like I was being manipulated than informed. I can honestly say that I want back the few hours of my life I spent reading this stuff. The data provided to support the argument is weak, and the supporting underwriting guidelines seem to contradict it. I'm guessing that the NAIC will consider this argument but ultimately dismiss it -- and in my opinion, that's the right decision.
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