The FIO’s recently developed auto insurance affordability index is raising questions about the cost of auto insurance for millions of Americans, but does it paint an accurate picture?
According to a recent study released by the Federal Insurance Office (FIO), nearly 19 million Americans live in areas where auto insurance is unaffordable. This includes millions of policyholders in the tri-state region, and more than 5 million in New York State alone. The FIO, an office within the Treasury Department, was created in 2010 alongside the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The study indicates that for millions of Americans — primarily in New York, New Jersey, Florida, Michigan, Texas, and Pennsylvania — the cost of minimum liability coverage is unaffordable. These findings were determined by assessing insurance premium and household income data already available to the Treasury Department.
FIO Used Census Data to Determine Affordability
The FIO made its assessment on a zip-code-by-zip-code basis, using the price of written minimum liability premium policies divided by the median household income of each zip code to produce an affordability index. By the FIO’s own definition, if this index exceeds 2%, then auto insurance in that zip code is unaffordable.
In their study, the FIO used data from more than 845 distinct zip codes, as well as data detailing the cost of premiums available from the Census Bureau. In doing so, they did not to take into account more complex data points (such as full coverage policies), and they did not assess premium costs outside of the standard market.
The FIO cited two justifications for choosing this assessment method. First, this data was readily available from the Census Bureau, and by using it, the FIO would avoid increasing administrative costs of the study by collecting data from more complex market and policy structures. Second, the FIO only wanted to assess the legally mandated minimum insurance requirement in any state.
Insurers Object to FIO Methodology
While consumer protection agencies and insurance providers alike agree that using minimum liability insurance requirements as the baseline for the index is the fairest way to judge insurance affordability, insurers have pointed out a few methodological slip-ups that undermine the validity of the FIO’s affordability index.
By only using the cost of premiums as written (as opposed to costs as quoted to individual drivers), insurers argue that the FIO data doesn’t accurately represent the real costs of insurance to drivers in any of the zip codes. In fact, the lack of dynamic representation of the individual, nuanced factors involved in auto insurance is precisely what makes insurance providers so apprehensive about embracing the index.
Auto insurance is a state-regulated consumer product, and for this reason, regulations and idiosyncratic legal requirements vary from state to state, which makes it hard to compare affordability across states. The index doesn’t yet take into account the myriad factors that insurers take into consideration when they assess the risk variables of individual drivers. Because insurers assume a huge variety of risks when issuing auto insurance policies, they must consider a huge quantity of complicated data in order to make a proper assessment.
When the study is performed again in 2017, the FIO intends to expand the categories of data it will consider. Insurers say that a more nuanced assessment could improve the validity of the index — but as it stands now, they say that the index can only be used to understand the fluctuating cost of insurance over time. As improvements to the index’s methodology are made, however, it will gain a greater degree of usefulness.