The Hidden Opportunity of Insurance Pricing Inequity

Is auto insurance accessible and affordable for lower- and middle-income Americans? Not according to this study by the Consumer Federation of America – yet there’s a powerful business opportunity hiding in the research. Let’s learn more.

Is basic liability unaffordable?

For drivers throughout the United States, auto insurance is required by law. But what happens when basic liability is more than one can afford?

Lower-income Americans must make day-to-day decisions about which financial fire to put out first: for example, going without groceries so they can pay a bill, or vice versa. For people in this bracket, auto insurance is one of the smaller fires on the list. Most people need a car to get to work, but one can drive for quite a while without insurance before facing the consequences of that. Sure, that’s dangerous and illegal, but it’s also the lesser of several evils for many Americans living hand-to-mouth.

The difficulty is exacerbated when insurance pricing models push premiums up for lower-income Americans, whose rate is often affected by socioeconomic factors such as “education, occupation, homeownership status, prior purchase of insurance, and marital status.” As the saying goes, it’s more expensive to be poor.

That trend holds even for drivers who log fewer miles. “In 11 cities tested outside of California, the nation’s largest auto insurers generally offered little or no premium reduction to low-mileage drivers compared with high-mileage drivers, even though insurance research indicates that how much you drive is among the most important factors in predicting accidents,” CFA reported.

Result: many Americans aren’t buying it

The natural consequence of the pinch is that many lower-income Americans are refraining from becoming customers.

This is a lose/lose for everyone involved. Uninsured drivers face potential losses and legal risks. Insurers face additional claims costs whenever one of their policyholders has a collision with an uninsured driver.

Insurers also lose out on a potential business opportunity: Americans who drive without auto coverage are customers whose business has not yet been earned. Which brings us to that hidden opportunity.

A call for innovation

The traditional pricing model is a great fit for many drivers. For others, it’s not – and it’s a law of business that when a market wants and needs a product, but can’t act on it because their needs aren’t being met by the options, opportunity knocks.

Most Americans who buck the mandatory insurance rule aren’t doing so because they’re incalcitrant rebels, but because the cost of complying simply isn’t doable. Eventually, some innovator within the industry will break new ground in this area and develop a disruptive proposition to which these drivers can gladly say yes.

It boils down to an unmet need. For insurers with the creativity to capitalize on that, there’s major potential here to expand the market.