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"New Cents-Per-Mile Car Insurance Law Could End Overcharging and Redlining"

September 27, 2001

Contact: Patrick Butler at (512) 695-5136
Texas National Organization for Women

Statement by Deborah Bell, President

Texas National Organization for Women (NOW) congratulates the Texas Legislature for passing the “cents-per-mile” car insurance bill - House Bill 45 - signed into law by Governor Rick Perry.  By adopting legislation NOW developed, lawmakers have taken a major step toward 1) making compulsory insurance work, 2) eliminating redlining and the stigma it creates, and 3) ending overcharging to insure cars driven less than average. The new option to buy miles of protection as needed (added to the odometer reading at a cents-per-mile rate) will enable a car owner for the first time to individually control insurance cost by the amount the car is used.

The law as passed gives insurers permission to offer the cents-per-mile option to whomever they wish. Texans should now demand that their insurers make this option available to every one of their insured. We need the per-mile alternative to fixed dollars-per-year prices that are forcing millions of cars to go uninsured. For example, owners of cars in a certain insurance price class - based on territory, car use and type, and driver type - now paying $500 per year in fixed installments could be offered the option of buying miles as needed at 5.0 cents per mile.

Compulsory insurance seems to work in upper-income zip codes where most people can afford to keep insurance on cars driven less than average.  Because these cars cost insurers proportionately less in claims, they bring in extra profits and insurers privately call landing their business “skimming the cream.”* Insurers use extra profits from “cream” customers to compete by holding car insurance prices down for their preferred customers who have many other insurance needs. Customers typically skimmed and overcharged are those who commute by carpool, bus or bicycle, and also women, older people, and households with more cars than drivers.

In low income zip codes, insurers redline many cars to higher “nonstandard” prices - not because their drivers are less careful, as insurers encourage everyone to believe - but because of the scarcity of “cream” to hold prices down. What really happens is that miles, costs, and insurance prices (per car) spiral up where high insurance cost and strong enforcement increase the incentive for ever more drivers to share fewer insured cars.

The new law directs the Insurance Commissioner to adopt by year’s end the few regulations needed (e.g., adding to the car’s ID card the odometer reading at which insurance expires unless more miles are bought).  Companies may begin insuring under the option January 1, 2002.  But if they then choose to withhold the option in order to protect their extra profits from insuring little-used cars, newly informed consumers can step up their demand for cents-per-mile rates and even turn to the Legislature to compel companies to offer it.  That is only reasonable in view of the fact that the Legislature compels Texans to buy insurance on motor vehicles regardless of how little they are driven, if at all.

We are pleased to acknowledge the leadership on the cents-per-mile option in 1999 by Fort Worth Rep. Lon Burnam and this year by San Antonio Rep. Ruth Jones McClendon, by Beaumont Rep. Joe Deshotel, by Chair of the House Committee on Insurance, Amarillo Rep. John Smithee, and by El Paso Senator Eliot Shapleigh.

* Occasionally in public, for example:  In 1961, in a professional paper on automobile insurance pricing called "Any room left for skimming the cream?" Proceedings of the Casualty Actuarial Society, Vol. 47, p. 30  (1961); and recently in insurance agent testimony, April 6, 1999 before the House Insurance Committee about companies “who are skimming by use of 1-800 numbers,” which is quoted in the July, 2000 Report to the Texas House Committee on Insurance titled "Why the standard automobile insurance market breaks down in low income zip codes", by Patrick Butler, on page 25.


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