New Jersey Regulators: Jobs, Education Are Sound Criteria to Rate Drivers

April 25, 2008

New Jersey insurers who use education and employment to rate drivers for risk are justified in doing so and the practice does not amount to racism or classism, according to a new, 581-page report released by Garden State insurance regulators.

The report comes barely two months after a similar report by a coalition of consumer advocacy groups in the state attacked the underwriting practices of GEICO, which uses the criteria widely in its rating. The groups contend the practice is tantamount to redlining by race and class.

They have not been the only ones to level that criticism. Last month, legislation was introduced in New Jersey’s legislature to ban insurers from using occupation and education to rate drivers. There is also a class-action lawsuit — alleging the practice is discriminatory — pending against GEICO in a Minnesota federal court.

Supporters of the practice – which include GEICO, other insurers, insurance trade groups and the state’s Department of Banking and Insurance – contend it has been a major factor in bringing down New Jersey auto insurance rates since the system was revamped in 2003. Proponents argue the use of education and occupation as rating criteria has boosted competition, lowered prices and made more coverages widely available. They also argue the practice is actuarially justified and that changing regulations could jeopardize the progress made in the state’s insurance system.

Opponents – which include watchdog group New Jersey Citizen Action and New Jersey Citizens United Reciprocal Exchange, an auto insurer that objects to the rating – argue the factors have no actuarial basis and are a proxy for discrimination, since the rates tend to disproportionately affect low-income and minority drivers. Those groups support the bill, S-1714, which would prohibit education and occupation as rating factors for auto insurance.

The new report by the Department of Banking and Insurance — which compares actual rating from GEICO with state Census dat — says the practice cannot be shown to be discriminatory. Auto insurers in 44 states use occupation and education as valid rating criteria, the department’s research found; similar inquiries by other states, also show that education and occupation play a statistically significant role in a drivers’ risk an insurance company.

Using online data from GEICO’s Web site, department officials used various examples to rate fictitious New Jersey drivers. The largest difference in premium between identical drivers with the lowest and highest categories of occupation and education was 19 percent. More typical differences were under 10 percent.

“Thus, for actual consumers, GEICO’s use of occupation and education rating factors results neither in dramatic rate differentials within GEICO nor in rates that make the insurance marketplace as a whole less affordable,” the report found. “On the contrary… rates have generally fallen across the marketplace since the re-entry of GEICO in 2004.”