Understanding Risk-Based Pricing in Auto Insurance: How Illinois Bills Could Backfire

The Impact of Illinois Bills on Auto Insurance Rates

Two bills proposed in Illinois this year, HB 4767 and HB 4611, aim to address rising insurance costs but could have the opposite effect. These bills, similar to their 2023 predecessor, HB 2203, would restrict insurers from considering nondriving factors that are highly predictive of claims when setting premium rates. This restriction could lead to higher costs for insurers, reducing competition and ultimately increasing costs for Illinois drivers.

Risk-Based Pricing: A Necessary Evil?

Risk-based pricing is a method where insurers offer different prices for the same level of coverage based on risk factors specific to the insured person or property. This practice allows insurers to offer lower premiums to lower-risk drivers, making insurance more affordable. However, it can also lead to perceived unfairness, such as higher premiums for people of color in urban neighborhoods. Despite these concerns, risk-based pricing is essential for maintaining a competitive and affordable insurance market.

The Role of Legislators in Addressing Insurance Costs

The current high-rate environment in insurance is driven by increasing insurer losses associated with higher frequency and severity of claims. Legislators should focus on reducing risks, containing fraud, and improving resilience rather than restricting pricing methods that could exacerbate these problems. For example, according to the Insurance Research Council, states with more restrictive rating factors, like California, often see higher insurance costs due to reduced competition and less accurate risk assessment.

To better understand and navigate the complexities of auto insurance, policyholders should educate themselves on risk-based pricing and advocate for policies that promote fair and accurate risk assessment. Staying informed and engaging with legislators can help ensure that insurance policies are both affordable and effective.