Why switching your car insurance can cost you

Last Updated May 24, 2017 3:25 PM EDT

Even in car insurance, size matters. It may pay to stick with a big-name insurer rather than go to the smaller, "non-standard" company. For one thing, the big boys may find out about it, and punish you for it.

That's the message from a new report by the Consumer Federation of America (CFA), which said several major insurers -- No. 3 Allstate (ALL), No. 5 Farmers and No. 9 American Family -- penalize drivers who want to switch from the smaller insurers such as Safe Auto and Country Wide to the major ones.

"Allstate charged 15 percent or $235 more on average to good drivers previously covered by non-standard auto insurers … than if they had been previously insured by State Farm," said CFA insurance consultant Doug Heller. State Farm is the nation's No. 1 insurer. 

Conversely, the CFA survey also showed that some of the major players, like Liberty Mutual and Progressive (PGR), did not discriminate based on previous insurance carrier, provided your driving record was good. But the difference in annual premiums when insurers did discriminate was considerable, as much as $912, or 22 percent, in Far Rockaway, New York, if you tried to switch from Country Wide to Allstate.

Robert Hunter, the CFA's director of insurance, tried to make the case that this was part of an attempt by the big insurers to "penalize" America's poorer communities -- first by underserving them and forcing them to turn to lesser-known companies for coverage and then by charging them more to get coverage from majors like Allstate, "effectively sentencing them to higher premiums for life."

Hunter cited New York Governor Andrew Cuomo's recent proposal to restrict insurers from using education and job status as factors in how much motorists pay in premiums. But the study had no evidence showing non-standard policies were exclusively sold in poor neighborhoods. On the contrary, the CFA study included Seattle, which has one of the highest income and housing values in the nation.

"Allstate's pricing has been and continues to be determined by risk and costs," said Justin Herndon, a spokesman for Allstate, in an email. "Insurance prices are risk-based so that lower-risk drivers pay less than higher-risk drivers. Allstate uses the likelihood of loss to price insurance, which is regulated by law. Allstate does not consider income, race or any other factors not related to the risk we are insuring when we set prices for auto insurance."

A recent Federal Insurance Office (FIO) study defined the difference between the three levels of auto insurance. "Standard" is what most people have. "Residual" is for those who've had serious problems, such as driving while intoxicated. In the middle is "non-standard," which represents about 7 percent of the total market. It's usually for new drivers, drivers with some moving violations, rare automobiles or drivers who cancel their policies frequently -- all of which certain insurers consider red flags.

Insurers were quick to criticize the study, saying it actually proved that the car insurance market is competitive. "All you have to do is turn on the television -- day or night -- to see the ads for both standard and non-standard insurance," said Vice President Dave Snyder of the Property Casualty Insurers Association of America. "The CFA is doing socio-political analysis. We're interested in profit."

"Most standard auto insurers ask prospective policyholders about their previous insurance history, and it's a legitimate question to pose when the insurer's goal is to price a policy to reflect the risk the insurer is assuming," said Insurance Information Institute spokesperson Michael Barry.

The CFA's Hunter responded that, with the statistics he had looked at, more than half the drivers in non-standard policies had good records and deserved to be "standard." He suggested that in some instances they were sold these policies from ads on mass transit and radio, while in others, unscrupulous or incompetent agents with little training would put poor people in these policies to get a bigger commission.

The CFA's Heller said this is changing, as city dwellers and immigrants become more familiar with the internet and the ability to get a car insurance quote by themselves. Which was just how the CFA conducted this study.

  • Ed Leefeldt

    Ed Leefeldt is an award-winning investigative and business journalist who has worked for Reuters, Bloomberg and Dow Jones, and contributed to the Wall Street Journal and the New York Times. He is also the author of The Woman Who Rode the Wind, a novel about early flight.