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Call for a Nationwide Ban on GEICO's Rating Methods

PRINCETON, N.J.--March 20, 2006--New Jersey Citizens United Reciprocal Exchange, (NJ CURE), a leading not-for-profit auto insurance provider in New Jersey, agrees with the recent statement by Consumers Federation of America (CFA) Director of Insurance J. Robert Hunter, and calls upon each state to ban the use of rating methods and underwriting guidelines that directly base rates and eligibility solely upon someone's education level achieved and their occupation. We believe these rating methods and underwriting guidelines have a serious adverse effect on minority consumers and lower income Americans and are unnecessary and unjustified.

On March 15, 2006 NJ CURE joined CFA in sending a letter(1) calling on the National Association of Insurance commissioners (NAIC) and each state commissioner to ban the use of education and occupation to base auto insurance rates nationwide. Prior to 2004's re-entry of GEICO in New Jersey, the auto insurer industry in the state never used such discriminatory practices in rating auto insurance due to its obvious impact on low-income and less educated citizens. In less than two years, several insurers have now began to use this method in order to prevent their insured's from leaving their insurance company for GEICO's more attractive rates for the more educated and white-collar workers. It is clear that if this practice is not banned, soon New Jersey's entire private passenger auto insurance marketplace will be compelled to base their rates solely upon a driver's education level achieved and occupation out of fear that they will not write a fair share of the more affluent, who are attractive for marketing other financial products (such as home, life and boat insurance as well as banking products).

It has also been discovered that GEICO, the nation's 4th largest auto insurer, adopts these rating methods and underwriting guidelines that directly base rates and eligibility solely upon education and occupation in 44 of 50 states(2). According to a recently published Star Ledger article, the GEICO methods of rating and eligibility, was discovered to charge a janitor without a four-year college degree in Newark, NJ over 70 percent more than an attorney with a graduate degree. Nationally, the average "surcharge" being applied by GEICO for those who are categorized by GEICO as "blue collar workers" with less education is over 40 percent. (See Exhibit 2 for a breakdown of the "surcharge" by state).

NJ CURE believes the purpose behind certain states deleting 'income earned' from credit scores in order to permit the auto insurance industry to use them was specifically to prevent any bias towards racial minorities and lower income individuals, and the use of occupation and education is simply a method to by-pass those efforts. GEICO has concealed the negative effect of these practices on minority and lower income consumers through the use of underwriting guidelines based upon education and occupation.

Unknown to applicants, GEICO uses four separate GEICO insurance companies - GEICO, GEICO General, GEICO Indemnity and GEICO Casualty to insure drivers. Each one of these companies uses different base rates that they charge drivers. If a driver qualifies for their preferred GEICO insurance company, that driver will receive their lowest rates. If a driver does not qualify for their preferred company, that driver will get a quote from one of their sub-standard companies and pay substantially higher rates.

GEICO places individuals whose highest level of education is a high school diploma in a "group" that is ineligible for the preferred GEICO company. The only coverage offered to this group by GEICO is through one of the sub-standard companies, which has significantly higher base rates. Most troubling is that these individuals are not even informed that they are being rejected by the preferred GEICO company due to their educational status alone.

Educational attainment not only correlates to income but to race. For example, according to the 1990 U.S. Census data, high school completion for Hispanics aged 22-24 was only 64 percent, compared with 91 percent and 84 percent for Caucasians and African-Americans, respectively. The disparate impact appears clear.

If someone has been driving 20 years without an accident or a ticket, why would their decision to simply work in a blue collar industry justify their car insurance rates being increased significantly? Similarly, why would someone unable to afford a four-year college degree be forced to pay more for car insurance if they never drive carelessly?

NJ CURE joins CFA in urging the National Association of Insurance Commissioners to act before competitive pressures lead to broader use of these harmful criteria. CFA's Hunter stated, "Liberty Mutual Insurance has recently also adopted educational attainment as a method of underwriting and rating as well. This illustrates that if an insurer sees a competitor doing this and believes there may be a modicum of adverse selection against them as a result, the insurer may feel forced to adopt this approach."

NJ CURE is proof that an auto insurer can grow successfully without the use of credit scores or the use of education and occupation. We stand by our belief that your driving risk should determine auto insurance rates, not your opportunity to afford a four-year college degree, or your decision to work as an electrician as opposed to as an attorney.

(1) A copy of the letter is available at our website www.njcure.com

(2) GEICO's official filing papers to the New Jersey Department of Banking and Insurance are attached at Exhibit 1. On page 3, GEICO indicates that people who also buy more insurance for liability (BI LIMITS) are the most "favorable risks." People who buy higher levels of insurance are typically more affluent ant. Page 3 also shows that the most "favorable risks" are those in Groups 1, 2, and 7, and the least favorable are Group 5 drivers. Page 5 shows the Groups themselves and their definitions. As you can see, Group 5 (least favorable according to the page 3 placement guide) are those who are minimally skilled and have only high school diplomas. Note: page 3 has a highlighted phrase that did not display properly in the scanner. It says, "Occupation Group."