H.B. 80 is short-sighted and would levy a tax on safe drivers
Delaware is poised to go back to the future with its approach to auto insurance. Inspired by California’s 1988 ballot initiative, Proposition 103, new Insurance Commissioner Trinidad Navarro wants the First State to embrace the insurance equivalent of a Casio Walkman in an era of big data, telematics, and self-driving vehicles.
Navarro has thrown his weight behind H.B. 80, sponsored by Rep. Trey Charles Paradee, D-Cheswold. Like Prop 103, the Delaware legislation would strictly limit which factors an insurance company may take into account when underwriting consumers and setting rates. In a recent op-ed, Navarro argued that factors such as credit scores, marital status, and employment status are “irrelevant” and their use by insurance companies leads to customers “being treated unfairly.”
“I do not believe that having poor credit, whether due to being laid off from a job or another life-changing event, is indicative of whether or not someone is a good or bad driver,” Navarro wrote in the News Journal.
Actually, credit-based insurance rating does not take into account employment status or income history, facts about which Navarro should already be aware. But his beliefs notwithstanding, the evidence has been clear for decades that a poor credit history is strongly correlated with a driver’s propensity to file claims in the future. Moreover, contrary to Navarro’s characterization of credit scoring as an “unfair discriminatory practice,” the largest studies of the topic, by the Federal Trade Commission and the Texas Department of Insurance, both found that credit scores were not a proxy for race.
Navarro instead proposes a system that would only allow insurers to consider a driver’s at-fault claims experience, driving safety record, the number of miles he or she drives annually and the number of years of driving experience, with mandatory discounts for more years of experience. But the data show that preventing insurance companies from using factors that distinguish between higher-risk and lower-risk drivers in an effective way forces everyone to pay more than they otherwise would. When rating is more precise, insurers can craft finer rating distinctions that benefit good drivers, including those with good credit, instead of needing to use overly general categories that lump risks together.
By looking to follow California’s lead, Navarro is asking the vast majority of Delaware drivers to subsidize their riskier compatriots. Functionally, H.B. 80 would levy a tax on safe drivers. It’s also short-sighted. The very rating flexibility the commissioner seeks to do away with actually will prove more crucial as self-driving and automated vehicles are rolled out in the years to come.
These vehicles, though sophisticated, will continue to experience accidents – in large part, because they will share the roads with human drivers. While the frequency of accidents is likely to fall, the cost of repairs will rise, thanks to the sophisticated components needed to operate these vehicles. To ensure that consumers pay as little as possible to insure these new types of vehicles, we need robust competition between carriers.
H.B. 80 would undermine that goal by eliminating insurers’ ability to innovate and mandating a myopic focus on driving records, just as the significance of those records begins to diminish. In fact, a recent California Senate Insurance Committee hearing on how Prop 103 would cope with the arrival of automated vehicles found that the state’s rigid structure, virtually identical to the one Navarro is seeking to adopt, will require modification and increased flexibility to cope.
Fortunately, one of the great strengths of the insurance regulatory system in the United States is that it is state-based. While there are costs associated having to comply with 50 different regulatory bodies and deal with some jurisdiction’s eccentricities, the system effectively insulates consumers from the rapid spread of malignant regulatory pathogens. What doesn’t work in one state becomes a learning experience that need not hobble another state.
As regulatory pathogens go, there is none more problematic than California’s Prop 103. Whatever the populist appeal of H.B. 80, lawmakers and drivers need only cast their gaze westward to understand the costly impact of such an affliction.
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