Consumer advocates have long argued that low-income drivers get ripped off when it comes to auto insurance quote. The insurance industry retorts that coverage is becoming more affordable and occupying a smaller share of drivers’ budgets than many other necessities. Now a federal agency is trying to write an official definition of affordable auto insurance, especially liability insurance, which virtually all drivers must purchase.

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What is affordable?

Every state except New Hampshire requires drivers to purchase at least a minimum amount of auto liability insurance. The minimum amount and other required coverages vary by state.

The Federal Insurance Office, which checks whether traditionally underserved communities have access to affordable insurance, has proposed defining auto liability insurance as affordable if it costs less than 2% of a household’s income. Rather than setting a single threshold based on a national average, the office would test affordability by applying the threshold to specific locations, including urban areas and areas with predominantly minority residents.

According to the Bureau of Labor Statistics, American drivers spent an average of 1.7% of their income, or $ 1,112 out of an average income of $ 66,877, on auto insurance. But the lowest 60% of earners spent more than 2% of their income on coverage, and the lowest 20%, who earned an average of $ 10,308 per year, spent 4.9% of their income – or $ 501 – in auto insurance, according to BLS data. .

“Unaffordable auto insurance leaves many Americans in the difficult situation of either not driving, which severely limits their economic opportunities, or driving without insurance, which is not only illegal, but puts them and others at risk. drivers, “a coalition of consumer groups wrote in a statement. Letter of August 31 to the Federal Insurance Office.

Auto insurance industry opposes proposed standard

The Property Casualty Insurers Association of America maintains that auto insurance is already affordable, even for drivers earning less than $ 20,000 a year. His analysis of BLS and Census data shows that low-income Americans spend about half as much on auto insurance as they do on entertainment. They also spend almost 60% less on insurance than on gasoline and motor oil and 85% less on insurance than on food.

“Just because a household with an annual income of $ 100,000 can afford to pay, say, $ 1,000 for an auto insurance policy, does not mean that a household with an annual income of $ 20,000 cannot. could not afford to pay the same amount for auto insurance, ”group wrote in response to FIO.

Finally, the group says companies have “little or no control over the costs that determine auto insurance premiums,” adding: “Pricing is an objective process that must be based on risk assessment. insured persons and their associated costs. That is, the high costs of medical care and auto repairs – and the high frequency of claims – in some areas push up premiums for all drivers, regardless of income.

The Insurance Research Council, another industry-backed research group, argued in a recent report that drivers of all income levels have spent a declining percentage of their income on auto insurance in recent years. decades. Using data from the BLS, the council estimates that low- and moderate-income drivers have spent about 2.8% of their income on auto insurance so far this decade, up from 3.4% in the 1990s.

Consumer advocates react

Consumers’ Federation executive director Stephen Brobeck said insurers were overcharging low- and moderate-income drivers by increasingly basing premiums on factors not directly related to risk, including education, occupation, marital status, home ownership and credit rating.

A recent study by NerdWallet found that consumers with poor credit pay an average of 76% to 123% more for auto insurance than consumers with excellent credit in the states surveyed. In comparison, a driver with excellent credit who received a DUI could expect to pay between 35% and 75% more for insurance.

“Our explanation, which has been corroborated by all the research we’ve done, is that the major auto insurers aren’t very interested in selling minimum liability insurance,” Brobeck said, adding that most customers wealthy people who buy additional coverage and multiple policies – like auto and home insurance – are more desirable.

The Federal Insurance Office recently completed its comments on the proposed definition of affordability. After finalizing it, the office will use it to control insurance costs. While the office has no power to do more than that, measuring affordability could motivate new state regulations or potentially an expanded federal role in the insurance industry.

Help is there

Low-income drivers in some states can take advantage of auto insurance affordability programs:

• California Low Cost Auto Insurance Program offers basic liability coverage of $ 213 to $ 472 per year. Premiums vary by county. The program is open to drivers 19 years of age and over who own a car worth up to $ 25,000 and meet income limits, such as $ 60,625 for a family of four.
• New Jersey Special Auto Insurance Policy provides medical coverage of $ 365 per year ($ 360 if paid all at once) to drivers eligible for federal Medicaid with hospitalization. It does not cover injuries or damage that drivers cause to others.
• Hawaii’s No-Fault Free Auto Insurance Program provides free coverage to people who receive financial assistance benefits or supplemental income benefits.

If your state doesn’t offer such a program, or if you don’t qualify, the best way to make sure you’re not paying more than you have to pay is to seek auto insurance quotes. NerdWallet’s auto insurance comparator can help you compare prices.

Aubrey Cohen is a writer at NerdWallet, a personal finance website. E-mail: [email protected]. Twitter: @aubreycohen.

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