Cost-Based Prices for Car Insurance

George Watts in an Opinion column (Jan. 27) argues that “auto insurance rates should be based on the financial risk the insured presents to the company.” Watts also argues specifically in support of “basing auto insurance rates on the loss experience in specific geographical areas.”

He argues that to refrain from basing insurance rates on cost of insurance is a form of taxation and is improper. He implies that insurance companies would prefer to charge everyone the same rates but are compelled by a sense of fairness to use cost-based pricing.

Insurance is a method of distributing the costs of damages over a broad enough base to render those costs affordable. As such, it is already a type of taxation, regardless of how insurance rates are calculated.

In the ultimate application of cost-based pricing, the insurance companies would be able to accurately forecast the actual losses for each individual insured. If they did so, and then based their rates accordingly, there would be no insurance; each person would pay for his own losses, plus a commission to the insurance company for administering the system.

Beyond that, many forms of cost basing, such as ratings based on sex or on geography, become in effect forms of sexual, racial, ethnic, or economic discrimination. Most people have no choice about their sex, and the poor have little choice about where they live.

It is grossly misleading to say, as Watts does, that “from an insurance company’s standpoint, it would be much simpler to charge everybody the same rate.” It might be simpler, but it wouldn’t be anywhere near as profitable.

By charging very high rates to high-risk groups and lower rates to certain very low-risk groups, insurance companies in effect are attempting to avoid insuring those of unacceptably high risk while confining their business to the more profitable lower-risk groups.

We are left with an insurance industry subsidized by laws that require auto insurance but which is pricing that insurance out of the range of affordability for the inner-city poor and thus evading the associated costs.

It is never fair if I have to pay the costs of an accident I had nothing to do with causing. But that’s what insurance is all about: cost distribution. If we don’t want to share the costs, then we don’t want insurance.

MIKE MEIER

Tustin