The Use of Occupation and Education Factors in Automobile Insurance

581 Pages·2008·13.21 MB·English

State of New Jersey
DEPARTMENT OF BANKING AND INSURANCE
PO BOX 325
TRENTON, NJ 08625-0325
JON S. CORZINE STEVEN M. GOLDMAN
Governor TEL [phone] Commissioner

The Use of Occupation and Education Factors
in Automobile Insurance
April 2008

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INTRODUCTION

Background

Occupation and educational attainment are two of more than one dozen
commonly used factors for determining the price of auto insurance in most
states, but the use of these factors has become a source of debate in New
Jersey and some other jurisdictions, leading to a variety of analyses, public
hearings and legislative initiatives.

In New Jersey and elsewhere, the practice of considering an insurance
applicant’s occupation or level of education is decades old; some insurers will
only cover drivers who hold specified occupations, and in several states insurers
charge less to applicants who have achieved certain educational goals.1

Not until 2004, however, had a company used occupation and education factors
both simultaneously and on a wide scale in New Jersey. GEICO’s national
business model is based in part on the use of these factors, and the company,
now the nation’s fourth largest, extended that model to New Jersey when it re-
entered the state in August 2004 after a 28 year absence. GEICO grew
extraordinarily quickly in New Jersey while using this model, becoming the state’s
third largest auto insurer by the end of 2006.

GEICO’s rapid growth and its use of these factors garnered public attention that
year, and legislative concern about the company’s use of the factors came to the
forefront with a Senate Commerce Committee hearing on June 12. Witnesses

1 “Membership” companies such as New Jersey Manufacturers Insurance Co., the state’s largest auto
insurer, require applicants to belong to specified occupations or trade organizations. Premium reductions
for specified educational achievements are provided in New Jersey under the “Good Student Discount.”
California has some of the most restrictive rules on auto rating factors in the United States but nonetheless
recognizes “academic standing” as a rating characteristic. See California Insurance Code, 10 CCR
2632.5(d). The California Insurance Department advises that it also permits separate rating systems for
“affinity groups” that may be related to occupation.
1
included New Jersey Citizen Action (NJCA), a citizen watchdog organization;
New Jersey Citizens United Reciprocal Exchange (NJ CURE), a New Jersey-
based auto insurer that objects to the use of these factors; GEICO; a variety of
insurance trade organizations; and Department of Banking and Insurance
Commissioner Steven Goldman.2

In general, those who supported the ability to use these factors testified that a
wide range of New Jersey consumers were benefiting from a 2003 package of
auto insurance reforms that attracted new insurers to the State and thus
prompted the growing use of the factors; that the ongoing use of the factors
appeared to be contributing to increasing price competition and availability of
coverage; that a regulatory change of course might jeopardize the market’s
substantial progress since 2003; that the factors appeared actuarially justified;
and that the Department had no statutory or regulatory grounds upon which to
deny their use.

Opponents of the use of these factors generally questioned the extent of the
success of the 2003 auto reforms; questioned the role of these factors in
implementing the reforms; questioned the actuarial basis for the factors; asserted
that the factors were proxies for race and income or, at minimum, had a
differential and negative effect on protected classes; asserted that the
Department violated its own regulations by allowing their use; and asserted that,
regulations aside, as a matter of policy the State should prohibit their use
because of their impact on low-income and minority drivers.

Attention to the use of these factors was further heightened on February 28,
2007, when NJCA issued a report titled, Risky and Wrong: New Jersey Auto
Insurance Rates for Lower Income and Minority Drivers, An Analysis of the
Impact of GEICO’s Use of Education and Occupation on the Price of Auto
Insurance.3

2 Written testimonies are found in Attachment 1.
3 See Attachment 2. Note that this attachment is the report as revised by NJCA on March 2.
2
The NJCA report expounded on the assertions that NJCA and other concerned
parties had made in the preceding months, and sought to quantify the impact of
education and occupation factors through an analysis of U.S. Census data and
actual rates charged by GEICO. NJCA reported that GEICO charged
dramatically higher rates to drivers with blue-collar occupations and less than a
college degree, and that census data demonstrated that this practice was a proxy
for race and class and had a differential effect on racial minorities and low-
income drivers.

On March 5, following the release of the NJCA report but before the Department
had an opportunity to analyze it, Department staff testified before the Commerce
Committee on S-1714 (Gill/Vitale), a bill to prohibit insurers from considering an
applicant’s occupation or education.4 The Department stated its specific
concerns about the scope and potential unintended consequences of the
proposed bill and reiterated its general concerns about changing course during a
period of extensive progress in the auto insurance market.

The bill was not released by the Committee. However, the Department
subsequently pledged to meet with NJCA and other groups to better understand
their concerns, and to conduct an analysis of both the NJCA report and the
issues raised by the sponsors and supporters of S-1714. The Department has
done so. This document reports the Department’s findings.

Process

As part of its analysis the Department examined:
• Statutes and regulations governing rating and acceptance decisions in
New Jersey.
• Relevant statutes, regulations and practices of other jurisdictions.
• The data and methodology of NJCA’s report.

4 S-1714 is Attachment 3; the Department’s testimony is Attachment 4.
3
• GEICO and other insurer rate filings with the Department.
• The findings of the Maryland and Florida insurance departments, two
insurance regulators that have issued reports on this issue since the
return of GEICO to New Jersey.
• Census data correlating race with occupation and education.
• Academic and government studies related to the potential differential
effect of various insurer practices.
• Court filings in a pertinent class action lawsuit against GEICO in
Minnesota.

In addition, the Department met with plaintiffs’ counsel in the Minnesota case and
conducted an independent, anonymous survey of GEICO’s rates via the
company’s website.

In each instance, the goal was to establish facts about the use of these factors in
New Jersey and across the country, to attempt to independently validate NJCA’s
findings (and where they could not be validated, to understand the
methodological or other issues responsible for the difference) and to better
understand various viewpoints on the issue of the possible differential effect of
the use of education and occupation as factors in auto insurance.

4
RATE REGULATION AND THE USE OF OCCUPATION AND EDUCATION
FACTORS IN NEW JERSEY AND OTHER STATES

New Jersey’s statutory standard for the approval of automobile and other
personal lines rating systems is set forth in N.J.S.A. 17:29A-7. That statute
directs that:

“If the Commissioner shall find that such rating-systems provide for, result
in or produce rates that are not unreasonably high, and are not inadequate
for the safeness and soundness of the insurer, and are not unfairly
discriminatory between risks in this State involving the same hazards and
expense elements, he shall approve such rates . . .”

This standard was originally adopted in New Jersey in 1944 and has continued in
effect to date. It is similar to the general standard applicable in most United
States jurisdictions since the 1940s.5

Since that time, New Jersey and many other states have amended their
insurance rating laws in various fashions while maintaining the “not excessive,
not inadequate, not unfairly discriminatory” standard as the fundamental criteria
for insurance rates.

In New Jersey, the statutory criteria have been amended to include the following:
1. N.J.S.A. 17:29A-15.1 requires premium credits for various optional policy
provisions required to be offered by New Jersey law;
2. N.J.S.A. 17:29A-36 requires uniform Statewide rating classifications; a
250% cap on the variation of base rates by class; a cap on the base class
in any territory (since repealed but with the limitation that the resulting
territorial rating differentials not be significantly disproportionate to those

5 Enactment of insurance rating laws in all states were precipitated by the enactment of the McCarran-
Ferguson Act, 15 USC 1101 et seq. which authorized the states broadly to regulate the business of
insurance.
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preexisting); and restrictions on the rating of automobiles with principal
operators age sixty-five and over.
3. N.J.S.A. 17:29A-37, which requires flattening of taxes, licenses, fees and
other expenses per insured automobile statewide; and
4. Various statutes enacted at different times that directed across-the board
rate reductions upon enactment of changes in other laws.

While other states have modified their insurance rating laws in similar ways,
either for general purposes or for automobile coverage in particular, few have
directly addressed the use of occupation or education level as auto rating criteria.
The absence of proactive statutory measures regarding such factors has
therefore meant wide acceptance of their use under the bedrock “not excessive,
not inadequate, not unfairly discriminatory” standard. 6

Thus, at the time of its approval of the GEICO rating system in 2004, the
Department understood that both occupation and education level were permitted
as rating factors in most other jurisdictions, with only a small number of states
having statutes or regulations that specifically addressed the issue in order to set
forth conditions under which such factors could be used. 7 This group included
Colorado and Pennsylvania.

The Department’s understanding in 2004 is consistent with a finding by counsel
for plaintiffs in a current, pertinent lawsuit against GEICO in Minnesota
(discussed later in this report) that, in actual practice, GEICO uses occupation
and education factors in essentially the same manner in forty-four jurisdictions.

In order to better understand how variations in state laws might affect the
determination to permit the use of these rating criteria, or to regulate the manner
in which they are used, the Department reviewed the auto insurance rating

6 Under this standard, “unfairly discriminatory” means that the factors are not actuarially measurable and
credible, and not sufficiently related to actual or expected loss and expense experience of the group.

7 New Jersey is among the minority of states that impose specific statutory restrictions on the use of
occupation as an acceptance criteria (as opposed to a rating criteria). These are discussed later in this report.
6
statutes of several other jurisdictions, starting with Colorado and Pennsylvania.
The Department’s findings are set forth below.

Colorado
Colorado's statute addressing insurance rates is set forth in the Colorado
Revised Statutes at C.R.S. 10-1-101, a single paragraph that includes the
standard:
". . . insurance rates shall not be excessive, inadequate or unfairly
discriminatory."

Regulations promulgated by the Colorado Division of Insurance, found at 3 CCR
702-5, Section 5B limit insurers' action to refuse to write, cancel, nonrenew,
increase premium, surcharge or reduce coverage. Section 5B.1 provides: "Basis
for refusal to write a policy of automobile insurance (i.e., acceptance criteria):
a) Colorado law prohibits discrimination solely based on age, color, sex,
national origin, residence, marital status or lawful occupation including
military service". (emphasis added)

Section 5B.5.a provides a similar prohibition against refusing to renew.

On their face, these provisions appear to preclude the use of occupation in
insurance acceptance decisions, though not in rating decisions. Personnel from
the Colorado Division of Insurance confirmed that while these provisions prohibit
the use of occupation as a reason to refuse an application or to nonrenew a
policy, they do not prohibit the use of occupation in a rating system to reflect
price differentials, so long as the differential is supported by adequate actuarial
justification. Additionally, the Colorado Department advised that they have
similarly required clear actuarial justification for any rating differences based
upon education. Therefore, it appears that Colorado's use and application of its
law and rules regarding these rating factors are similar to the New Jersey
practice.

7
Pennsylvania
Pennsylvania statutes addressing this issue are set forth in its code at 40 P.S.
1171.5. Paragraph (a) of that statute defines "Unfair Methods of Competition"
and "Unfair or Deceptive Acts or Practices" in the business of insurance to
include:
". . . (7) unfairly discriminating by means of: . . . (iii) making or
permitting any unfair discrimination between individuals of the same
class and essentially the same hazard with regard to underwriting
standards and practices or eligibility requirements by reason of
race, religion, nationality or ethnic group, age, sex, family size,
occupation, place of residence or marital status. The terms
"underwriting standards and practices" or "eligibility rules" do not
include the promulgation of rates if made or promulgated in
accordance with the appropriate rate regulatory act of this
commonwealth and regulations promulgated by the commissioner
pursuant to such act." (emphasis added)

This statute appears to set a standard similar to the New Jersey practice which
distinguishes acceptance criteria (whether coverage is provided) from rating
criteria that determine price. According to the Pennsylvania Insurance
Department, this reading is correct and neither this statute nor any other current
provision of Pennsylvania insurance law would prohibit varying rates based on
occupation if the insurer provided sufficient actuarial evidence supporting the
differential.

Minnesota
Minnesota's statute at section 70A.04 sets forth the standard language that rates
shall not be "excessive, inadequate or unfairly discriminatory," adding that an
insurer shall not use rates to engage in unfair price competition. With respect to
unfairly discriminatory rates, Subdivision 4 of the statute states that:

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"One rate is unfairly discriminatory in relation to another if it clearly
fails to reflect equitably the difference in expected losses, expenses
and the degree of risk. Rates are not unfairly discriminatory
because different premiums result for policyholders with like loss
exposures but different expense factors, or like expense factors but
different loss exposures, so long as the rates reflect the differences
with reasonable accuracy. Rates are not unfairly discriminatory if
they attempt to spread risk broadly among persons insured under a
group, franchise or blanket policy."

As noted in the Minnesota litigation referenced above, it appears that GEICO's
use of occupation and level of education is permitted by this standard.

Florida
Florida statutes addressing automobile insurance rates are set forth in the Florida
Statutes at section 627.0651. That statute contains the widely accepted
standard to prohibit rates that are "excessive, inadequate, or unfairly
discriminatory." Subparagraph (6) states: "one rate shall be deemed unfairly
discriminatory in relation to another in the same class if it clearly fails to reflect
equitably the difference in expected losses and expenses." Paragraph (7)
states: "rates are not unfairly discriminatory because different premiums result for
policyholders with like loss exposures but different expense factors, or like
expense factors but different loss exposures, so long as rates reflect the
differences with reasonable accuracy." Paragraph (8) states: "rates are not
unfairly discriminatory if averaged broadly among members of a group; nor are
rates unfairly discriminatory even though they are lower than rates for non-
members of the group. However, such rates are unfairly discriminatory if they
are not actuarially measurable and credible and sufficiently related to actual or
expected loss and expense experience of the group so as to assure that non-
members of the group are not unfairly discriminated against."

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