On April 10, the Federal Insurance Office, citing its authority under the Dodd-Frank act to monitor whether underserved communities have access to affordable insurance, posted a request for comments on how it should go about defining and monitoring the availability of affordable auto insurance in minority and low- and moderate-income communities.

The Dodd-Frank law that created FIO gave it no general supervisory or regulatory authority over insurance. However, some in state regulatory and industry circles have expressed concern that FIO may be interested in expanding federal oversight of the business under its chief, former Illinois Insurance Director Michael McRaith.

During a Congressional hearing in February after the release of the FIO report on modernizing insurance regulation, McRaith kept people guessing when he was pressed about whether he was out to federalize the regulation of insurance.

He dismissed the debate over state versus federal regulation as a “relic” of a bygone era. When one lawmaker specifically asked if McRaith anticipates seeking federal regulatory power from Congress, he answered merely that he supports doing FIO’s job.

McRaith said at that time that FIO was working on availability and affordability issues and that he wanted to develop a plan to reduce rate oversight and make more low-cost insurance products available.

Regarding the request for comments in the Federal Register, the FIO appears interested in measuring how well the current auto insurance system serves certain traditionally underserved populations. The summary of the FIO’s request reads as follows:

“The Dodd-Frank Wall Street Reform and Consumer Protection Act provides the Federal Insurance Office with a number of authorities including monitoring the extent to which traditionally underserved communities and consumers, minorities, and low- and moderate-income persons have access to affordable insurance products regarding all lines of insurance, except health insurance.

“Treasury issues this notice to elicit comment from state insurance regulators, consumer organizations, representatives of the insurance industry, policyholders, academia and others as appropriate regarding: (1) a reasonable and meaningful definition of affordability; and (2) the metrics and data FIO should use to monitor the extent to which traditionally underserved communities and consumers, minorities, and low- and moderate-income persons have access to affordable auto insurance.”

The FIO notice said that owning an automobile is “likely associated” with a higher probability of employment and other factors associated with economic well-being.

While it varies by state, the population of drivers without insurance is estimated to be about 14 percent countrywide, according to 2006 figures from the Insurance Research Council (IRC).

Several industry studies have reported that auto insurance has become more affordable over time, but consumer groups argue that it has become less affordable for minorities and low- and moderate-income consumers.

A November 2013 study by the IRC, “Auto Insurance Affordability,” tackled the issue while first noting the difficulty of the task.

“Many industries—including healthcare, real estate and retail—have grappled with affordability issues for decades, using diverse methods to identify and measure affordability. Insurance is no different. The existing literature on auto insurance affordability is diverse, and there is little consensus on an appropriate definition of affordability or method for tracking changes in affordability over time,” the IRC study said.

Among the findings of the 2013 IRC study were these that indicated an improvement in affordability:

• From the 1990s to the 2000s, the ratio of average auto insurance expenditure to median income fell by more than 9 percent nationally. The report said this implies a significant improvement in affordability of auto insurance in the most recent decade.
• The average auto insurance expenditure to low-income ratio also fell by 9 percent. This, IRC said, indicates that auto insurance affordability also improved in the more recent decade for the lowest income quintile.
• All but six states (Alaska, Florida, Louisiana, Michigan, Montana and Wyoming) experienced an improvement in the average auto insurance expenditure to income index from the 1990s to the 2000s.
• All 50 states and the District of Columbia experienced an improvement in average auto insurance expenditure to income index from the earlier part of the decade (2001–2005) to the latter part of the decade (2006–2010). These findings suggest that auto insurance has become more affordable, over time, across the states, according to the IRC.

According to figures from the National Association of Insurance Commissioners, the typical U.S. auto insurance premium dropped to $791.22 in 2010, more than 3 percent less than in 2006 ($817.99)

Recent figures compiled by Perr&Knight’s RateWatch showed that personal auto insurance companies increased their rates by an average of 2.5 percent countrywide in 2013.

The Consumer Federation of America (CFA) has alleged “disparate treatment” of low- and moderate-income families by auto insurers. CFA maintains that the auto insurance marketplace “denies important economic opportunities, especially those related to employment, to low- and moderate-income households.”

The consumer group has been asking state insurance commissioners to consider lowering minimum liability coverage requirements and creating low-income purchase programs.

Another consumer advocacy group, The New York Public Interest Research Group (NYPIRG), said an analysis it did shows some of New York State’s largest auto insurers are charging higher premiums to motorists who have less education and those who hold nonprofessional, nonmanagerial jobs. NYPIRG is urging New York regulators to review the auto insurers’ ratemaking in New York, and state lawmakers have begun an inquiry about use of education, occupation and other rating criteria.

During his Congressional testimony in February, McRaith talked about data mining and the use of personal information by insurers, questioning whether the states understand how the information is collected and used.

FIO said in its request for comments that the definition of affordability as it pertains to personal auto insurance remains unclear.

Last year, an advisory subcommittee within Treasury suggested that affordability means that the cost of auto insurance is a “reasonable percentage of a consumer’s income.” FIO said that measuring affordability according to this definition is a “difficult and subjective” task. It suggested that one approach may be to interpret premiums as affordable if they do not prohibit individuals or families from purchasing other necessities. Or personal auto insurance may be interpreted as affordable if it is actually purchased by individuals and families, FIO said.

In addition, FIO’s entry in the Federal Register notes that various metrics have been employed to measure availability and affordability of personal auto insurance. These include: the market share of the top 10 writers of personal auto insurance; the market share of the residual market; the average auto insurance premium; the loss ratio; and an affordability index calculated by dividing the average auto insurance premium by median household income.

The industry reacted to the FIO request for feedback on auto insurance affordability with caution about the difficulty of defining the term and about where FIO might be headed with its inquiry.

Jimi Grande, senior vice president of federal and political affairs for the National Association of Mutual Insurance Companies (NAMIC), agreed with the FIO that defining the terms availability and affordability is difficult and subjective.

“We can appreciate that the FIO is seeking input to help establish a metric for determining availability and affordability of insurance, which went undefined in the Dodd-Frank Act. Unfortunately, this is an exercise in defining the highly subjective—there are no authoritative standards that determine what constitutes a properly available or affordable insurance product. Whenever anyone has tried to force a definition, by necessity it has resulted in extremely vague criteria, which are open to wide regulatory and judicial interpretation and which have been used to subject the industry to arbitrary rules,” Grande said.

Grande said his group will work with FIO. “[W]e understand that FIO has a job to do, and NAMIC will work to provide FIO with our views on approaching the issue and how such a definition should and should not be applied with regard to FIO’s duties,” he said.

At the Property Casualty Insurers Association of America (PCI), there is concern that FIO’s inquiry could lead to steps that undermine risk-based pricing, according to Dave Snyder, vice president of international policy for PCI.

“Risk-based pricing is the fundamental reason why this line of insurance is so beneficial for all concerned,” the PCI executive said. “We would strongly oppose any movement away from pricing according to risk, as it is subject to regulation by the states. Right now there is significant innovation in how the prices are determined. PCI hopes that this report does not slow down the innovation and hinder competitiveness in the market.”

The NAIC did not respond by press time to an email request for comment.

The FIO is accepting comments until June 9. As of April 15, none had been submitted. The FIO request can be viewed and comments submitted here.

(This article was originally published on the website of Insurance Journal’s, a sister Wells Media publication of Carrier Management. Reporter Andrew Simpson is the VP of Content for Wells Media.)