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Better Drivers Should Pay More for Insurance?

An insurer develops an innovative technique to separate good risks from bad.  Consumer groups become outraged, race gets mentioned, lawsuits commence and legislators start threatening to change the law -- and in some cases they do. This is the pattern behind the insurance industry's attempt to use the insurance credit score to discriminate between high and low risk drivers.  It is also the pattern behind the uproar in California as the industry uses zip codes to distinguish between drivers who live in high and low risk areas.  Now, GEICO has entered the New Jersey market with another rating innovation--educational attainment. (AP 2/27) Better educated people seem to have lower risk of accidents and GEICO wants to pass this savings along to the good drivers.  A lawyer, under the GEICO plan, would pay about $1,000 less than a janitor would presumably because the lawyer is a lower risk given a similar car and driving record.

Consumer advocates seem to miss the point about risk based pricing arguing that if it is not related to driving, then it should not be employed as a rating factor.  However, if education is correlated with a person’s ability or incentive to take care, why not use this information?  The correct answer for the consumer advocate is never because one should pay more for one’s poor driving habits or for one’s costly choice of locale.  The consumer advocates seem to always put what they consider fairness, but is really simple minded egalitarianism, ahead of efficiency.  How is this "fair" if good drivers pay more than they should?



Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.