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CFA Misunderstands Insurance
The Consumer Federation of America's recent report on auto insurance rates paid by low and moderate income (LMI) consumers demonstrates that the organization either does not understand the basic risk concept of insurance or, in the alternative, chooses to ignore it.

As Wikipedia explains, insurance "is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment." Thus, whether an insurance premium is "properly" priced depends on the risk-adjusted value of expected losses relative to the premium. The higher the risk level which is being insured against, the higher the premium should be for amount of coverage.

Although risk-based pricing is inherent in auto insurance, the CFA study never mentions whether or how claims payments for damage and theft differ by a neighborhood's average income.

Thus, even though the study compares auto insurance rates in high and low income areas by using consumers with comparable driving records, age and gender - recognizing that these are risk factors which legitimately influence premiums, relative theft losses is never mentioned. The result is a lost opportunity.

CFA has raised an important issue about the possibility that LMI consumers may be experiencing discrimination in the insurance marketplace. There could well be insurance market problems for economically vulnerable consumers that need to be corrected. Unfortunately, it's not possible identify any such problems based on the consumer watchdog's biased report.

All consumers would benefit from a thorough analysis how the auto insurance market is experienced by LMI consumers. To be credible, however, such a study would need to adhere to the quality and review standards set by the Data Quality Act. The sooner work begins, the better.

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