The Federal Insurance Office of the United States Department of the Treasury was established pursuant to Subtitle A of Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Federal Insurance Office (“FIO”) has authority to monitor the extent to which “Affected Persons”[1] have access to affordable insurance products other than health insurance.[2] The FIO is proposing new regulations that will define what constitutes affordable automobile insurance for minorities and low- to moderate-income individuals (“LMI”).[3] The FIO is seeking comments from insurance regulators, consumer groups, the insurance industry, policyholders and academia regarding three particular items:
(1) its proposed definition of affordable personal auto insurance;
(2) the key factors FIO proposes to use to calculate an affordability index for “Affected Persons”; and
(3) the best way to obtain appropriate data to monitor affordability of personal auto insurance for “Affected Persons.”
Insurers and the insurance bar should take notice of the activity and proposals of the FIO relating to this issue and should provide comments by Aug. 31, 2015.
The FIO is monitoring the availability and affordability of personal auto insurance for “Affected Persons” for several stated reasons – most U.S. jurisdictions require motor vehicle owners or drivers to maintain liability insurance; the percentage of uninsured motorists nationwide has dropped; auto ownership increases access to jobs for low-income commuters; and insurers and consumer advocates disagree as to whether auto insurance has become more affordable for low- to middle-income consumers and minorities.[4]
In April of 2014, the FIO issued an “Affordability Notice” soliciting comments regarding a “reasonable and meaningful definition of affordability” of personal auto insurance and the metrics and data that the FIO should use to monitor Affected Persons’ access to personal auto insurance.[5] Eighteen groups and organizations provided comments, including the Center for Economic Justice, Property Casualty Insurers, the National Association of Insurance Commissioners (“NAIC”), the Insurance Information Institute, the Insurance Research Council, the Financial Services Roundtable, the American Insurance Association, and the Consumer Federation of America. Based in part on the feedback provided, the FIO has attempted to come up with a proposed working definition of affordable personal auto insurance based on an affordability index. According to the FIO, this working definition of affordability is necessary to guide further analysis and monitoring of access to personal auto insurance.
The proposed definition is as follows:
A personal auto liability insurance policy is affordable if the annual premiums are within the financial means of most people as measured by an affordability index for Affected Persons in the standard market. Personal auto liability insurance is presumed to be affordable if, with respect to household income, the affordability index does not exceed two percent for Affected Persons in urban areas, for LMI persons within a specific geographic area (including rural areas), or for all individuals in majority minority geographic areas.
This definition is derived from five factors: (1) a definition of affordability; (2) a definition and calculation of an affordability index; (3) a calculation of average daily premium; (4) a definition of market scope for an affordability index; and (5) a definition of “Affected Persons.” “Affordable” is defined as being within the means of most people.
The FIO’s proposed affordability index would be determined by the total annual written premium for insurers writing personal auto policies divided by the number of policies, or the total annual premium quoted by a sample of insurers writing personal auto insurance divided by the number of insurers in the sample, or both.[6] Likewise, the FIO proposes to calculate premiums using one or both of the following metrics – the total annual written premium for all insurers writing personal auto insurance divided by the total number of policies, or the total annual premium from a sample of insurers divided by the number of insurers in the sample.[7]
The FIO’s proposed affordability index calculation is limited in scope to the standard insurance market.[8] The proposed working definition of “Affected Persons” includes those within urban areas, those with a median family income less than 50 percent of area median income (i.e., low income) and those with a median family income of at least 50 and less than 80 percent of the area median income (i.e., moderate income), individuals living in areas where the annual income of the geographic area is less than 80 percent of the median household income of a metropolitan statistical area or state (i.e., LMI individuals), and minorities (defined as Black Americans, Native Americans, Hispanic Americans and Asian Americans) in ZIP codes where the minority population exceeds 50 percent.[9]
Based on these parameters, the FIO presumes personal liability insurance is affordable if, for Affected Persons, the affordability index is less than or equal to 2 percent of household income.[10]
The FIO notes that the data available to it through sources such as the NAIC and Bureau of Labor Statistics (“BLS”) and data from certain states relating to premiums for personal auto insurance is inadequate to allow it to monitor the extent to which “Affected Persons” have access to affordable auto insurance.[11] Although state insurance regulators and the insurance industry have suggested that the FIO should rely on existing data sources such as NAIC, BLS and the states, the FIO apparently disagrees and instead concurs with consumer organizations that urge the FIO to collect data from insurers themselves – either by directly collecting transactional data from the carriers or indirectly from the carriers’ websites and from vendors.[12]
The proposed regulation states that “insurers have the most complete and accurate information that would allow the FIO to perform its function of monitoring the extent to which Affected Persons have access to affordable auto insurance” and suggests that therefore, insurers “can provide accurate price quotes for a given profile of a driver, including for a specific geographic area. In addition, insurers have the information to calculate the average annual premium for liability coverage for personal auto liability insurance in the standard market for urban areas and areas where the majority of residents are minorities or LMI persons.”[13]
While the FIO’s end game is unclear, without question, defining availability and affordability of insurance is a highly subjective exercise. A definition based upon vague criteria will be subject to wide regulatory and judicial interpretation and can easily result in application of arbitrary rules. Likewise, this exercise could ultimately undermine risk-based pricing and thus disrupt innovation and competitiveness in the auto insurance market. In addition, it raises concerns of expanded federal oversight of this traditionally state-regulated industry.[14]
The public has until Aug. 31, 2015 to comment on the proposed regulation. In particular, the FIO seeks comments, supporting documents and illustrative information regarding
(1) the FIO’s proposed working definition of affordability in relation to personal auto insurance;
(2) the key factors the FIO proposes to use to calculate an affordability index; and
(3) how the FIO can best obtain appropriate data to effectively monitor affordability of personal auto insurance for “Affected Persons.”[15]
The Federal Advisory Committee on Insurance will convene an open meeting at which this topic will be discussed on Aug. 6, 2015 in Washington, D.C.[16]
[1] “Affected Persons” are traditionally underserved communities and consumers, minorities, and low- to middle-income (“LMI”) persons.
[2] 31 U.S.C. §313(c)(1)(B).
[3] Department of the Treasury, Monitoring Availability and Affordability of Auto Insurance,
http://federalregister.gov/a/2015-16333 (July 2, 2015).
[4] Id. at 3.
[5] Monitoring Availability and Affordability of Auto Insurance, 79 FR 19,969 (Apr. 10, 2014).
[6] Department of the Treasury, Monitoring Availability and Affordability of Auto Insurance, http://federalregister.gov/a/2015-16333 (July 2, 2015), pp. 8-9.
[7] Id. at 9.
[8] The proposed regulation notes that by not including in its calculation of an affordability index the annual premiums for the highest risk drivers – those in the residual and non-standard markets, it diminishes the impact of the annual premiums charged to those high risk drivers. Id. at 9.
[9] Id. at 10-11.
[10] Id. at 11.
[11] Id. at 12.
[12] Id. at 6.
[13] Id. at 14.
[14] See Andrew G. Simpson, “Updated: Federal Insurance Office Seeks Comments on Auto Insurance Affordability,” Insurance Journal (April 17, 2014).
[15] Id. at 14. Comments should be submitted electronically through the Federal eRulemaking Portal: http://www.regulations.gov or by mail (if hard copy, preferably an original and two copies) to the Federal Insurance Office, Attention: Lindy Gustafson, Room 1319 MT, Department of the Treasury, 1500 Pennsylvania Avenue NW., Washington, DC 20220. All comments should be captioned with “Monitoring Availability and Affordability of Auto Insurance” and should include the name, group affiliation, if any, address, e-mail address and telephone number(s) of the commenter. Comments will be posted on http://www.regulations.gov without change. Comments, attachments and supporting materials will be part of the public record.
[16] See 80 Fed. Reg. 140 (July 22, 2015), p. 43557, for information regarding attendance and registration.