The FederalInsurance Office of the U.S. Treasury Department adopted a methodology for gaugingthe affordability of automobile insurance that some in the industry say ignoresrisk factors and is potentially overreaching.
The FIOstated July 13 in a Federal Register notice that personal autoliability insurance "is presumed to be affordable" if it does not exceeda certain percentage of median income. Specifically, the FIO uses a ratio that involvesthe median household income for ZIP codes identified as majority low- to moderate-income.Auto insurance is deemed affordable if it does not exceed 2% as a ratio of the averageannual written personal automobile liability premium divided by the median householdincome for ZIP codes identified as being majority-minority or majority-low-and-moderate-income,the FIO stated. The FIO cited an employment statistics report indicating that, basedon other 2013 data, consumers spent about 1.6% of average income after taxes onauto insurance. It will be using the methodology to monitor affordability in personalauto insurance.
AlthoughJimi Grande of the National Association of Mutual Insurance Companies acknowledgedthat the FIO's statutorily mandated mission of monitoring insurance affordability"is an ill-defined and nearly impossible task that asks the FIO to create astandardized metric of something that is inherently subjective," he still lambastedthe FIO's approach.
Grande,senior vice president of federal and political affairs for NAMIC, said in a statementthat the FIO's methodology "ignores all existing government data on auto insuranceexpenditures and even the fundamental principle that insurance should be pricedaccording to risk, which means the same standard would be considered for a driverwith a perfect driving record and one with multiple accidents."
"Thereis great danger in arbitrarily establishing a threshold for which our governmentwill deem a product affordable. What's next, whether the car itself is consideredaffordable? The gasoline fueling it? Is there a need for the government to determineif auto repairs are affordable?" Grande asked.
Otherinsurance trade groups representing auto underwriters expressed concern as well.In a statement, the American Insurance Association mentioned state laws on tortreform and minimum insurance requirements as factors that did not seem to have beenaccounted for in the FIO's methodology.
The PropertyCasualty Insurers Association of America worried about the use of an alleged "artificialincome level" used to determine affordability that it said did not take intoaccount risk and factors that actually drive up coverage cost. PCI pointed to "rapidlyescalating" distracted driving, traffic congestion and alcohol and drug useas the primary determinants of insurance rates and affordability.
The FIOsaid its aim is to make sure that personal auto liability insurance policies areaffordable if the annual premiums are within the financial means of most people,citing the importance of owning a car coupled with the legal requirement for autoinsurance to drive it.
"Accessto affordable auto insurance is crucial for consumers who commute to work, drivekids to school, and meet the needs of their families," FIO Director MichaelMcRaith said in a release. He referred to the last two years of input from stakeholdersthat preceded the new methodology. McRaith called the methodology "a meaningfulstep" toward better understanding the affordability of auto insurance for consumersand underserved communities across the country.
In April2014 and July 2015, the FIO sought comments regarding the methodology from stakeholders,including state insurance regulators, consumer organizations and representativesof the insurance industry.
The FIOseemingly anticipated criticism in the multiyear process by noting that some federalagencies use an index to measure affordability, pointing to indexes used by theU.S. Department of Housing and the Consumer Financial Protection Bureau, which hasa definition of "qualified mortgage" that uses, in part, a ratio involvingthe consumer's total monthly debt to total monthly income.
The FIOalso pointed to the fact that the Consumer Federation of America had commented thataffordability must be precisely rather than loosely defined and that 2% of the householdincome of an affected person is the appropriate standard.
"Giventhe use of indices by other federal agencies, and FIO's statutory authority to monitoraffordability for affected persons, FIO endorsed the concept of an affordabilityindex for personal automobile insurance and proposed to calculate an affordabilityindex for personal automobile insurance for affected persons," the FIO stated.
"Affectedpersons" is defined by the FIO as underserved communities and consumers, minorities,and low- and moderate-income people, collectively.