Asbury Park Press

Geico Assumes Risk In Rating Drivers By Education, Job Status

Asbury Park Press — Tuesday, March 21, 2006

By CALVIN M. HOY

About a year after bestowing great praise on the regulatory environment for auto insurance in New Jersey, Warren E. Buffet may have to rethink his position. Buffet is the chairman of Berkshire Hathaway, which has insurance holdings in Geico. Right now Geico is in the eye of a hurricane of protest, at least in New Jersey.

According to published reports, Geico uses education and job status, among other things, to measure risk when underwriting insurance policies. Apparently, at least according to Geico, education and job status on the one hand and risk on the other hand are inversely related so that as educational attainment increases risk decreases. Thus, those with the lowest levels of education are charged the highest rates on auto insurance.

According to Phyllis Salowe-Kaye, executive director of New Jersey Citizen Action, the use of education and job status to measure risk is "really unconscionable." Lisa Di Saveria of 69 News, WFMZ-TV, Allentown, Pa., said "It's deplorable. I can't believe they're allowed to do something like that." And according to Assemblyman Neil Cohen, D-Union, who is introducing legislation to end this practice of measuring risk, this is merely an attempt "to charge regular folks a higher rate."

Though Geico's use of education and job status is harmless, the attempt to prevent Geico from using these criteria is harmful. Prior to the enactment of the New Jersey Auto Insurance Competition and Choice Act in June 2003, the auto insurance industry was in disarray. Over the preceding 10 years, 20 firms left the New Jersey market. For eight years, there was no entry in the New Jersey market. Since June 2003, there has been a revival in the auto insurance market.

The competition and choice law allows firms to establish risk by using industry-accepted standards approved by the New Jersey Department of Banking and Insurance. If firms are not allowed to use what they regard as accurate barometers of risk, we may reverse the recent improvements in this industry.

There are two questions to ask. The first is inconsequential but others may disagree. The second question is the fundamental question.

First, is Geico right? Do education and job status accurately gauge risk?

Education and job status are used in other states and by other firms in New Jersey besides Geico. If firms in the industry use these criteria, there would seem to be something to it.

In addition, Geico had to present evidence of the efficacy of the criteria to the insurance department, which accepted it. This is one more reason to believe the criteria are effective.

However, since Geico had to present evidence to the insurance department, let the the department make the statistics public. That way everyone can see and judge the evidence for themselves.

The second and more important question is this. If Geico is wrong, who is harmed? My answer is Geico and only Geico. If Geico is using an inaccurate gauge of risk, it is accepting high-risk drivers and turning away low-risk drivers. The failure to use an accurate gauge will obviously have an unhealthy effect on Geico.

The consumer, even the consumer with low educational attainment, can find an insurance company that does not use the same criteria. They can take their business elsewhere.

If wrong, Geico will be punished as good drivers go to other insurance companies. Geico's punishment will be inflicted by the market, which rewards success and does not tolerate failure.

Calvin M. Hoy teaches economics at the County College of Morris, Randolph.

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