Should You Pay More For Auto Insurance Because Of Your College Degree (Or Lack Of One)?

January 30, 2014

Insurance companies are all about managing risk -- especially the risk to their bottom line. We understand why insurers charge higher premiums to smokers than non-smokers, or why they charge more to cover amusement parks than accounting firms: they know that the likelihood of issuing out a payout is much higher for the former.

But should insurance companies assign higher rates to drivers without college diplomas, or charge less for folks with law degrees than those who studied film? A coalition of consumer groups in California say "no", and they're petitioning state officials to prevent insurers from doing so.

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A press release from Consumer Watchdog insists that many of California's insurers are in direct violation of Proposition 103, which was passed by voters in 1988. Among other things, Proposition 103 established that car insurance rates would be based primarily on three factors:

  • The safety record of the driver in question
  • The number of miles that he or she drives each year
  • The policy-holder's years of driving experience.

According to Prop 103, insurers can't consider any other factors in setting auto insurance rates without submitting them to California's Commissioner of Insurance for approval -- and in order to win approval, the factors have to be "substantially related to the risk of loss".

Obviously, insurers weren't happy about Proposition 103, but they've found a way around it by implementing across-the-board rate increases, then offering discounts to certain "affinity groups" like those who work in particular fields or those with special university degrees. Consumer Watchdog and 13 other groups insist that this creates an unfair pricing system, wherein folks without such degrees or those who work in other fields are penalized, and they've filed a petition with Commissioner of Insurance Dave Jones to prohibit such practices.

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In a free-market economy, we understand that companies have the right to price their products as they please. According to economic theory, the winners and losers in such a marketplace will be determined by consumers alone: companies that offer a good product or service at a good price will survive, and those that don't, won't.

However, auto insurance is a little different. Unlike, say, doughnuts or baseball bats, consumers are required to purchase auto insurance. If they don't, they can't legally drive, and for many, driving is crucial to their ability to hold down a job. As such, it's in the best interest of California (and its economy) that auto insurance prices be fair and uniform. Who knows? It might even improve the insurance industry's appalling image problem.

We'll keep you posted as this story progresses.  


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