Dr. Valdes Featured on Wallet Hub

Is it fair for car insurance companies to consider gender or age when setting premiums?

Short answer: yes. However, when considering fairness, we need to delve deeper. Is it fair for everyone to pay the same rate, regardless of their driving record? Is it fair that individuals who cause more accidents drive up the cost for the car insurance company, leading to higher rates for everyone? These are important questions to consider when discussing car insurance rates.

Car insurance companies charge different drivers different rates based on the "risk" a driver poses. If it is likely for a driver to get into an accident, the insurance company is more likely to have to pay the driver. The car insurance company should also consider the potential damages they may have to pay for an accident. You could imagine a person who gets into multiple minor fender benders does not impose a significant cost on the insurance company; however, a person who rarely gets into an accident but causes a lot of damage would have a substantial cost to the insurance company.

Car insurance companies consider gender and age when setting premiums because it helps them assess risk. Age is an important factor when determining risk because the younger a driver is, the less experience driving they have. Less experienced drivers are more likely to have accidents. Moreover, younger people tend to engage in risky behavior more often than older people, e.g., driving recklessly, driving under the influence, and not wearing seat belts. Traditionally, younger men are riskier drivers and tend to pay higher premiums.

A young driver may be reading this and saying, “Hey, this is not fair; just because I am a young male, I have to pay higher rates even though I don’t engage in risky behavior, and I drive slow.” My answer is that you are correct; that is not fair. However the insurance company can only assess risk based on the data they see. For example, they can see your age, location, type of vehicle, driving record, if you are a student, and an estimate of how far you drive. The insurance company has to predict the likelihood of damages they would have to pay based on this information. Technology is helping in this area. Now, insurance companies offer a device that drivers can put into their cars that monitors how they drive. This gives the insurance company more information and allows them to better assess the risk of insuring a specific driver. This could be to a driver's benefit if they do indeed drive very safely.  

Is it fair for car insurance companies to consider a driver's occupation when setting premiums?

Maybe. It depends on how the car insurance company is using this information. Again, the car insurance company should be trying to assess the likelihood of an accident and the cost of that accident to them. How does knowing a driver's occupation help the car insurance company assess this risk? I could see a scenario where a nurse works odd hours, causing them to drive tired and increasing the likelihood of getting into an accident. I am not convinced that this information is extremely useful to insurance companies. However, if you use your car for work and drive around more, it would be useful for the insurance company to know this to help it assess risk. For example, you drive more if you use your car to make deliveries. Therefore, it increases the likelihood of you getting into an accident. I could see this being unfair if the car insurance company uses the occupation to charge different rates to people based on their income. The economic term here is price discrimination. For example, imagine a case where two drivers have an equal risk of having an accident. Still, insurance companies charge higher premiums to drivers in occupations that earn more. This is first-degree price discrimination, where people who have a higher willingness to pay are charged a higher price.

Do you think car insurance companies are fair to college students?

I would assume so. Usually, college students are seen as more responsible. In turn, they are viewed as safer drivers. There are discounts given to college students, e.g., "good student discounts". These discounts could also be the case of price discrimination, where college students have a lower income and are willing to pay less than working people. Either way, this means slightly lower premiums for college students.