Are Good Drivers Paying Too Much for Car Insurance?

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The short answer is yes. But it’s actually not as bad as one would think.

A study released by the Consumer Federation of America (CFA) found that good drivers, those with no accidents or tickets, were being overcharged by the major insurance companies. The study which looked at two types of drivers from 15 cities living in medium income territories found that over half their quotes were over $1,000 and a third of the quotes were over $1,500. The CFA used the online rating tools found on insurer’s websites to compare quotes. CFA, Commissioner J. Robert Hunter, was understandably upset, saying, “Our research suggests that most rates charged moderate-income drivers are neither fair nor affordable.” He recommends that insurance companies should standardize their rates.

Here’s my take. Insurance companies charge vastly different prices for the exact same customer (as the study found) because each insurer is going after a different target market (i.e. customer). Their actuaries, the guys who crunch all these stats, figure that certain customers are more profitable than others and have adjusted their rates to attract the ones they want. Conversely, insurance companies have increased the rates for the customers they don’t want. If insurance companies were forced to all charge the same rates, it would mean some insurance companies would become hugely profitable (usually the larger ones) and some would go out of business (usually the smaller ones). This would then force customers of the smaller insurers to sign up with the larger insurers. What’s so bad about this, beside the loss of jobs these insurance companies provide? These customers would end up paying higher rates than before as they would be the very customers the insurance company is not targeting. In fact, under this scenario, everyone’s rates would go up as there would be less insurance companies to share the risk pool.

While it may sound counter intuitive, it’s actually in the consumer’s interest that insurance companies have different rates. For example, what happens when two stores charge the same price for milk? You tend to buy it from the more established brand or the one that’s more convenient for you. Instead of going to the corner store, you’ll just buy the milk from the grocery store where you buy all your other groceries from. But if the milk was much cheaper at the corner store, say it was $2,000 cheaper (which is the spread between quotes found in this study), you would prefer to buy it from the corner store. Depending on you look at it, the only pro (or con) is that the onus is placed on the consumer to shop around for the insurer that “wants” them.

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