Federal regulators have adopted a methodology for monitoring the affordability of automobile insurance, capping years of debate and public comments. Property/casualty insurers, however, said the new process is arbitrary, vague and misdirected.

What the U.S. Department of the Treasury’s Federal Insurance Office (FIO) developed: An index that determines auto insurance as unaffordable if average auto insurance liability premium paid by consumers in minority and low-income neighborhoods is more than 2 percent of the median income in those neighborhoods. It did so based on requirements stipulated in the Dodd-Frank Wall Street and Consumer Protection Act, which authorizes FIO to monitor consumer access to affordable insurance products.

“We remain concerned that the methodology fails to provide a relevant definition of the term ‘affordable,'” Lisa Brown, the American Insurance Association’s senior counsel and director, compliance resources, said in prepared remarks. “Factors such as state-based tort reform laws, consumer choice in levels of coverage, and state minimum insurance requirement laws do not appear to have been taken into account while FIO devised this methodology.”

The National Association of Mutual Insurance Companies said it was “deeply concerned” about the new FIO affordability methodology because of its perceived vagueness and avoidance of basic insurance concepts.

“The methodology ignores all existing government data on auto insurance expenditures and even the fundamental principle that insurance should be priced according to risk, which means the same standard would be considered for a driver with a perfect driving record and one with multiple accidents,” Jimi Grande, NAMIC’s senior vice president of federal and political affairs, said in a prepared statement.

Grande noted that the FIO sought feedback from “all stakeholders” during the process, and that “it accepted NAMIC’s argument that the methodology should rely on publicly available data rather than calling for data directly from companies that would ultimately raise costs.” The end result falls far short, Grande said, arguing that it “remains a troubling standard that may not provide an accurate picture of the highly competitive auto insurance marketplace.”

Robert Gordon, senior vice president, policy development and research at the Property Casualty Insurers Association of America, was both conciliatory and concerned about the new FIO methodology requirements.

“PCI appreciates FIO’s collaboration and constructive focus on the mandatory minimum auto insurance low-income consumers need to own a car,” Gordon said in prepared remarks. “We remain concerned, however, that the final methodology remains flawed by declaring an artificial income level to determine affordability without reference to other household expenditures or consideration of risk or cost drivers as PCI had suggested.”

Gordon said “for most consumers, the cost of buying a car and maintaining it and fueling it far exceed any insurance costs, making the regulatory fixation with insurance affordability somewhat misdirected.”

He also pointed out that increased distracted driving, congested traffic and alcohol/drug use have led to more auto accidents and loss costs. These primarily determine auto insurance rates and affordability, he added.

Similarly, the Insurance Research Council warned the FIO that the 2 percent figure is arbitrary, and that there is no external standard to support it. The IRC said that an affordability index relating the cost of auto insurance coverage to income is good to monitor affordability over time, but not to presume auto insurance is affordable or unaffordable at a given moment.

How FIO Calculates Its Methodology

The FIO calculates its auto insurance affordability index by dividing the average annual personal automobile liability premium by the median household income for zip codes determined as majority-minority or majority low-and-moderate income. If the number comes in at under 2 percent, then the insurance is deemed affordable, the FIO said. Above that number, the insurance is determined to be unaffordable.

Consumer and civil rights groups have generally supported the methodology and fixed percentage, but they FIO did not use all of their proposed conditions.

FIO said it chose its 2 percent threshold after considering that the overall cost of living varies substantially across the country, due in part to the variation in household income. FIO argued that by basing the threshold on a specific percentage of household income, the measure will adjust, in part, for the variation in the overall cost of living and income levels from region to region.

The FIO asserted that using household income at the zip code level would work better, because this approach is also used to determine the affordability of other consumer products.

Plans call for the FIO to study and report on automobile insurance affordably each year, using its methodology. What is unclear is what will the findings be used for beyond simply reporting them.

States, not the federal government, regulate auto insurance.

*Material from a related Insurance Journal article was used for this story.
*For the Insurance Journal’s take on the FIO methodology, click here.
*Read more about the FIO methodology and process at this Federal Register link.