Lower-Income Families May Pay More for Auto Insurance Many low-income families cannot afford car insurance, at least in part because insurers price their policies in ways that cost them more, according to a new report from the Consumer Federation of America. In fact, in some cases, the cost of insurance can be a greater impediment to car ownership than the cost of the vehicle itself, the authors said. That has broad economic implications since those without cars have a harder time getting to work, school, day care or the grocery store. "There is much academic research that clearly shows that if you have ready access to a car, it dramatically improves your economic opportunities," said Stephen Brobeck, executive director at the Consumer Federation of America, who co-wrote the report with J. Robert Hunter, director of insurance at the group. The report, "Lower-Income Households and the Auto Insurance Marketplace: Challenges and Opportunities," reviewed the existing literature from academics and regulators and includes findings from the authors" own research. "The release of the report is just the beginning of our initiative to try to inform the country, particularly state regulators, who can do a great deal to mitigate the problems," Mr. Brobeck said. Auto insurers price insurance based on a variety of factors, but the authors argue that many of their methods put lower- and moderate-income families - or households with roughly $20,000 to $40,000 in earnings - at a disadvantage. Homeowners, for instance, often pay less than people who do not own their homes, while people in low-paying occupations who have less education pay more. In fact, the study cited 2006 research that found that those with less education and working in less skilled occupations would pay premiums that were, on average, 40 percent higher. Meanwhile, consumers with thin or blemished credit histories are charged more, as are drivers who had previous coverage with lower limits on bodily injury. While insurers are prohibited from asking for a driver's income, the authors said that hasn't stopped insurers from asking for information that they can use as a proxy for earnings. "We think education, occupation and credit scores are surrogates for income," Mr. Hunter said, adding that nobody has studied how using the combination of those factors affects the poor. Occupations that have no driving risk affiliated with them but do have lower incomes tend to pay more, so it raises serious questions. The study also found that some insurers were charging more for policies with less coverage, which, they said, is likely to disproportionately affect lower-income households since they may be more likely to buy those policies. "Some companies charge more for the basic limits for the state than they would for higher limits for the exact same driver," Mr. Hunter said. "It's like going into a store and saying, "I want a box of cereal," and the big box is much cheaper than the little box." They found evidence of this happening in states including Arizona, Texas and Arkansas, but not in New York or California. For instance, in Texas, they found that two major insurers would charge a single female with a 2007 Toyota Camry who is living in low-income areas in Dallas, San Antonio and Houston anywhere from $27 to $75 more each year for a policy with minimal liability coverage. It was hard to determine how widespread the issue was because of the limited amount of information available on the state insurance departments" Web sites. "We were shocked that we found it anywhere," Mr. Hunter said. He added that the issue should be researched further. But a more common way to deny coverage is to "grossly overprice it," the paper said. Most states require car owners to buy liability coverage for bodily injuries and property damage, with the exception of New Hampshire. This type of insurance pays for the expenses incurred by people the driver injured (or property that they damaged) in an accident where someone is at fault. The most common bodily injury limits are $25,000/$50,000 - which means the insurer will pay up to $25,000 for a person's injuries, and $50,000 for all injuries related to one accident - and property damage limits of either $10,000 or $25,000. But insurers recommend that people with assets get more coverage. "The big problem is that mandatory coverage is so expensive, often costing over $1,000 in urban areas that it prevents them from buying a car," Mr. Brobeck said. Consider two drivers in California: a single female over the age of 30 who has been driving for six to eight years, but who logs less than 10,000 miles a year with no traffic violations; and a single male under 30 years old, who has been driving for three to five years, but has one traffic ticket and one "at fault" accident. At four major companies, the woman will be charged annual premiums of $694 to $1,039 in Compton, a low-income area in Los Angeles, and premiums of $570 to $1,058 in Sunnyside, a moderate-income area. For the same coverage at three of the companies, the man would be charged annual premiums of $1,628 to $2,353 in Compton and premiums of $1,334 to $1,734 in Sunnyside, the paper said, citing the California Department of Insurance's 2011 Auto Insurance Rate Comparisons. The high prices help explain why many motorists in these communities choose to risk fines for driving uninsured, the paper said. In 2007, the Insurance Research Council estimated that about 14 percent of car owners drive without insurance, though Mr. Hunter said the rate is probably about double that among household with low to moderate incomes. So what do they propose? The authors said that pricing should be largely influenced by factors that drivers can control, like the cars they drive and how far and safely they drive them. "Poor people, we know from the data, they spend a lot less on gas, which means they are driving less," Mr. Hunter said. So if insurers more fully reflected miles driven in pricing, it would lower the rate for poorer people. The paper also points to programs in states, like California, which allow lower-income drivers to qualify for a cheaper alternative as long as they meet certain requirements. In California, drivers who own a vehicle worth less than $20,000 and who have incomes of less than $27,000 to $55,000 - depending on family size - and who have driven at least three years with a clean record can qualify for minimal liability coverage at relatively low rates. While the average annual premium in Los Angeles was $802, the paper said the annual premium for drivers in the program was $358, which also happens to be the highest premium the program charges in all of California. The authors also suggested potentially lowering the minimum amount of liability insurance that lower-income households are required to purchase. Mr. Hunter said he had already suggested to the Federal Insurance Office to collect more data on the issue. "The states are cracking down on the uninsured," Mr. Brobeck said. If they are going to do that, they have a responsibility to ensure that lower income people can afford to drive. What do you think should be done?