AARP Hearing Center
Background
The American economy depends on insurance, which provides financial protection for consumers when accidents, natural disasters, and other risks become reality. Insurance is crucial for consumers as it provides financial protection and peace of mind against unexpected losses. The ability to transfer risk to an insurance company allows consumers to mitigate potential financial losses, providing security and stability in the face of unforeseen events. Some forms of insurance are effectively required. For example, people are not allowed to drive without insurance, and lenders will not provide a mortgage to an uninsured home. This makes it especially important to ensure access to insurance policies at fair rates. In addition, the complexity of insurance contracts places the average consumer at a disadvantage in the marketplace. Plain-language information on key features is thus critical to enable people to choose the best policies for them.
Risk reduction through premiums: Insurance is based on risk-pooling. That is, it spreads the financial burden of individual losses across a larger group. No single policyholder bears the full cost of an unexpected event. The best way to keep insurance costs down is to lower the risk of the insurance pool so that less money must be paid out to cover losses. Premiums can be set in a manner that encourages individuals and households to reduce their risk. The key to doing so is to set premiums based on factors that have a clear and direct connection to risk. For example, one factor determining auto insurance premiums is an individual’s driving record. Those who have moving violations or have gotten in crashes will typically pay more for insurance because they are a higher risk. This provides added incentive to lower risk by engaging in safe driving habits.
Sometimes, however, the factors used to set premiums do not have a clear and logical connection to risk. For example, low credit scores do not cause higher risk of auto crashes, but they are often used to set auto insurance rates. The use of these factors does not provide incentives to lower risk. In fact, it may do the opposite—those with high credit scores, in this example, might not have an incentive to drive more safely because they already enjoy a low premium due to a nondriving-related factor. Moreover, these factors can disproportionately affect certain communities. For example, Black, Hispanic/Latino, and people with low incomes are more likely to have low credit scores, which can lead to higher insurance premiums—even though insurance-based credit scores do not reflect risk (see also Credit Reports and Scores).
Claims service: This refers to the process that insurance companies use to resolve policyholders’ claims. Some claims are processed quickly and efficiently. However, delays, inaccurate or unfair practices, and lack of accountability sometimes make it difficult for consumers to receive the financial support they are entitled to under their insurance policies.
Auto insurance: Auto insurance is essential for everyone who owns a car. Some policies, however, drastically raise premiums or drop coverage once policyholders reach a certain age, regardless of driving record. In addition, auto insurance rates may reflect factors beyond driving behavior in ways that increase premiums for certain groups. For example, unless prohibited by state law, an insurer may take into account the policyholder’s marital status, income, education, gender, or credit score based on correlations between these factors and supposed risk. The use of credit scores has been defended on the theory that drivers with higher credit scores are less likely to file excessive or frivolous claims.
Insurance in the sharing economy: Sharing economy companies use online platforms to connect people wanting to exchange goods or services with people who need them (see also The Sharing economy). Challenges can arise when a customer is harmed and the individual providing the good or service does not have adequate insurance.
Volunteer driver programs: Some people who volunteer with nonprofit, community-based volunteer driver programs have reported difficulty in obtaining auto insurance coverage for their volunteer duties. Insurance agents sometimes confuse them with drivers for transportation network companies (TNCs), also known as ride-hailing services. TNC drivers use their personal vehicles to provide rides for hire. Personal auto insurance policies generally do not cover TNC driving because they are commercial in nature. Volunteer drivers in these programs are not offering TNC services, though they may be reimbursed for mileage. Passengers sometimes pay modest fees to the nonprofit organization sponsoring the program, which help offset the cost of offering the program. But these fees do not go to the volunteer driver. In some cases, insurance company policies and call center practices may mistakenly increase premiums or deny coverage to volunteer drivers by applying the insurance requirements demanded of TNC drivers (see also Insurance coverage for volunteer drivers).
Telematics programs: These apps or devices installed in vehicles collect data on driving habits. Many insurance companies are encouraging customers to install these devices with the promise of premium discounts for safe drivers. The savings can be substantial for safe drivers—upward of 30 percent savings with some insurance companies. The insurance industry claims that telematics device use improves driving safety. To date, millions of U.S. drivers have agreed to use telematics tracking devices or apps.
Insurance telematics programs also bring potential consumer protection concerns and thus need regulatory oversight and enforcement. The collection of sensitive personal information, including location, could put the consumer at risk if privacy and security protections are not put in place (see also Data Privacy and Data Security). Data could be used for reasons unrelated to safety, such as marketing. Data could also be shared with or sold to an affiliate or third party. Moreover, insurance telematics programs have been found to penalize nighttime driving. This could increase premiums for night shift workers and others who must drive at night. These drivers are disproportionately Black, Hispanic/Latino, and low income.
Liability insurance: This provides financial protection for individuals and businesses if they are held legally responsible for causing injury or damage to another person or property. It typically covers legal costs, settlements, and judgments, ensuring that the policyholder does not have to bear the full financial burden. In some industries, liability insurance is required by law. This includes health care, construction, manufacturing, professional services such as law and accounting, and many others. If liability insurance is unavailable or unfairly priced, the economy may suffer from financial instability or reduced business confidence.
INSURANCE POLICY TERMS: Policy
INSURANCE POLICY TERMS: Policy
Availability of coverage
Policymakers should require fair terms and conditions in insurance to ensure availability and coverage. In particular, age alone should not be used to limit coverage. Insurance companies should be prohibited from:
- denying access to insurance coverage provided in the policy,
- refusing to insure people,
- canceling or failing to renew policies,
- unfairly raising premiums,
- reducing death benefits, or
- unfairly limiting coverage. Older adults, people with disabilities, and people with preexisting and chronic illnesses should be able to obtain insurance with fair pricing and terms.
Insurers should be prohibited from raising costs unfairly or severely limiting service in neighborhoods with certain racial or ethnic makeups.
Insurance companies should be encouraged to improve benefits and coverage for mental illness treated by a licensed mental health practitioner (see also Mental Health).
Fair pricing for all
States should require insurance companies to make their products available at fair and reasonable rates, including to people with disabilities, preexisting conditions, or chronic illnesses.
Any factors used to underwrite or price insurance should have a clear and direct connection to the actual risk of providing insurance. This is known as having a logical nexus to risk. Factors not related to risk should not be used to underwrite or price insurance.
Policymakers should prohibit the use of credit reports and credit-based insurance scores to underwrite or price insurance. Insurance companies should clearly disclose to consumers the factors that are used to determine rates, including credit history.
Insurers should be required to evaluate their rules, algorithms, and use of data to ensure that they do not disproportionately harm groups that are discriminated against.
Insurance policy premiums should be payable on an installment basis. Any fees should be reasonable and only cover the costs associated with the payment.
Disclosures and transparency
Insurance companies should be required to provide clear, plain-language information about costs, coverage, limitations, exclusions, and complaint procedures before customers buy policies.
Insurers should be required to provide clear explanations of the specific factors resulting in premium increases, nonrenewals, refusals to offer a policy, or claim denials. They should also provide information about how to appeal decisions.
Claims service
Policymakers should require insurance claims to be processed quickly and accurately. They should require high standards for claims processing that apply to all insurance policies.
Departments of Insurance should invest more resources in identifying and prosecuting unfair claims-handling practices.
Auto insurance
Policyholders should be compensated reasonably and in a timely manner for claims resulting from auto crashes. Auto insurance should provide adequate coverage at a fair cost.
Insurance companies should not be allowed to cancel, fail to renew, or raise auto insurance policy rates based on age alone.
States should support reduced automobile liability insurance rates for drivers upon successful completion of state-approved driver-improvement courses.
Liability insurance
States should explore new options to guarantee the availability of liability insurance to those who need it.
States should consider expanding insurance to create new forms of risk-sharing, such as market assistance plans and joint underwriting associations. If these prove insufficient, states should establish mandatory risk-sharing or assigned-risk programs. These alternatives must be regulated as carefully as regular insurance companies are in order to protect policyholders.
Regulators should allow liability policies to be canceled before the expiration date only when there is good cause, such as failure to pay premiums, and after reasonable notice is provided. Refusals to renew should require a written explanation and a reasonable notice period. There must be protections against nonrenewals for certain types of insurance, such as medical malpractice.
Insurance coverage in the sharing economy
State and local governments should require sharing economy companies to ensure that providers have appropriate and adequate insurance coverage to protect both providers and consumers (see also The sharing economy).
Insurance coverage for volunteer drivers
Policymakers should protect the insurability of volunteer drivers who otherwise maintain a consistent risk profile. Policymakers should prohibit insurance companies from denying or canceling insurance, imposing a surcharge, or increasing rates solely on the basis of serving as a volunteer driver.
Personal auto insurance policies should make clear that they cover volunteer driving. This includes increased training for employees.
Nonprofit volunteer driver service providers should buy excess liability coverage for volunteer drivers to ensure adequate coverage.
Personal insurance policies should:
- explicitly state that volunteer driving is covered.
- include model language from the Insurance Service Office statingthat the policy exclusion for transportation network companies does not apply when the vehicle is being used for volunteer or charitable purposes.
- clearly state that for-hire/livery status applies only to commercial, for-profit service and not to volunteer drivers. This should be the case even when volunteer drivers receive mileage reimbursement or when their passengers are charged a fare or other fee to offset the cost of running the not-for-profit.
Telematics programs
Telematics programs that collect consumer-generated driving data should improve driver safety and integrate consumer protections. Consumers should provide affirmative consent to participate. Programs run by insurance companies should lower costs for safe drivers.
State insurance departments should establish rules and conduct oversight and enforcement regarding the use of telematics. These rules should address fairness, pricing, transparency, and consumer privacy and security issues (see also AARP Consumer Data Privacy and Security Principles, Data Privacy, and Data Security).