The Progressive Corporation (PGR), The Allstate Corporation (ALL), Travelers Companies Inc (TRV) – Auto Insurers: Does Pricing “Discrimination” Pay?

The Consumer Federation of America recently released a report condemning some insurance companies, such as The Progressive Corporation (NYSE:PGR), for using education level and occupation to set rates for auto coverage, while commending others, such as The Allstate Corporation (NYSE:ALL) and Travelers Companies Inc (NYSE:TRV), for not using these factors.

The CFA calls the practice “discriminatory,” while others view it as adept underwriting. Judgments aside, I wondered: Is there a difference in performance between the insurers that use these factors in underwriting and those that don’t?

The CFA study

According to a CNBC article:

CFA went online to get price quotes for two hypothetical customers: a factory worker with a high school diploma and a plant supervisor with a college degree.

Both were the same in every other way: a 30-year old single woman who rents in a moderate-income neighborhood, drives a 2003 Honda Civic, had no accidents or moving violations in the last 10 years and who went without insurance coverage for the past 15 days.

The price-shopping … attempts to get quotes from the 10 largest insurance companies for the minimum required liability coverage in 10 major urban areas …

Based on its analysis of the country’s top 10 insurance companies, CFA found price quotes that were as much as 40 percent higher for drivers with less education and lower-job status.

Insurance companies that used these factors in pricing:

American Family Insurance — private company

Liberty Mutual — private company

Geico — owned by Berkshire Hathaway

Progressive — public company

Farmers Insurance — owned by Zurich Insurance

Insurance companies that did not use these factors in pricing:

Allstate — public company

State Farm Insurance — private company

Travelers — public company

USAA — private

Stock price performances

There are only two public companies in each category, so this is hardly a statistically significant study. (I’m not including Berkshire Hathaway, as Geico is just one of many holdings. Also, keep in mind Farmers Insurance is just one of Zurich’s holdings.) Additionally, the companies have different business mixes. A more exact study would compare only auto loss ratios.

1-year advantage: non-“discriminators”

The Allstate Corporation (NYSE:ALL), by far, was the top performer. Travelers Companies Inc (NYSE:TRV), the other company that didn’t consider education and occupation in pricing decisions, came in the middle of the pack, roughly tied with The Progressive Corporation (NYSE:PGR).

YCharts

5-year advantage: n/a

One might give the advantage to the companies that didn’t use the personal factors because one of them, Travelers Companies Inc (NYSE:TRV), is a runaway winner. However, that fact is muted by the others’ performances.

YCharts