PRISONERS OF THE ZIP CODE: HOW SINGLE ZIP CODE RATE-MAKING HURTS THE PUBLIC INTEREST.

• Author: Fernandez, Ansell

1. INTRODUCTION

   Pedro Gonzalez's ("Pedro") family knew something was wrong when his small dog came back home alone after their usual night walk. (3) His mother, a resident of Miami's Little Havana community, immediately went looking for him, only to find a heavy presence of first responders nearby. (4) Pedro, her only son, laid pinned under a nearby vehicle, the result of a hit-and-run accident. (5) He would later die from his injuries, leaving behind a devastated family. (6) The story of Pedro is not unique in Florida. (7) According to a recent report by the Florida Highway Patrol, there were around 92,000 hit-and-runs in 2015, of which 186 resulted in fatalities. (8) The reasons why drivers flee an accident scene vary. (9) Driving without insurance is one of the main reasons cited for hit-and-runs. (10)

   In 2012, Lebron Stinson ("Lebron"), was unemployed but desperately looking for work. (11) He did not have a car and found it almost impossible to secure employment without a reliable mode of transportation. (12) His despair was evident: "It's a painful situation here. I'll tell you, I'm not one to give up hope, but, man, it makes your self-esteem drop. Your confidence disappears.... I need a job, but I can't get there." (13) Lebron's reality is not unique either. (14) The problem of transportation and job security is very real, exacerbated by high insurance premiums that make car ownership in low income households expensive and unattainable. (15) According to a recent study, sixty percent of zero-vehicle households in the largest metropolitan areas were of low income. (16) However, forty-two percent of those with a car in these same areas were of high income. (17) Even where public transportation is available, the stigma of not owning a car can be an obstacle to getting or keeping a job. (18)

   Lebron and Pedro are not related by blood; their similarities lie in a common link: higher insurance premiums increase the probability of their individual misfortune by increasing the rate of uninsured drivers who can potentially hit-and-run and by reducing vehicle ownership in low income communities. (19)

   This comment argues that using socioeconomic data (20) to calculate auto insurance premiums within the boundaries of a single ZIP Code (21) disproportionally increase premiums on low income households, leading to higher rates of uninsured drivers in these communities. (22) Furthermore, this comment discusses how this rate scheme provides a possible avenue to illegally discriminate based on race, as a direct result of historical racial segregation and recent advances in big data. (23) Part II.A of this comment discusses the recent amendment to the insurance laws of Florida that now allows the use of a single ZIP Code to calculate auto insurance rates. (24) Part II.B provides a short history of the evolving methods of racial segregation in Florida. (25) This section also asserts that the legislature failed to take into account the geographical correlation between ZIP Code boundary lines and the perpetuating and constricted racial composition of neighborhoods in Florida. (26) Part II.C discusses the latest advances and capabilities of big data. (27) It also presents the ever-advancing capacity of big data to collect and forecast personal behavior. (28) Part III.A discusses the experience rating system and the areas of moral hazard and adverse selection. (29) Part III.B discusses the impact of high premiums on the cost of vehicle ownership and its impact on socioeconomic mobility. (30) Part III.C presents a comparative analysis to understand the actual effectiveness of progressive criminal punishment for uninsured drivers. (31) Finally, Part IV argues that Florida should follow the lead of California and prohibit the use of single ZIP Codes and socioeconomic factors in rate calculations. (32) Additionally, it proposes the establishment of a reimbursement system for consumer intervenors in rate-making decisions as possible solutions that can reduce premiums, and lead to lower rates of uninsured drivers and more vehicle ownership in low income households. (33)

2. BACKGROUND

   Florida expressly prohibits insurance companies from setting rates, refusing insurance, or canceling an insurance policy based on a person's "race, color, creed, marital status, sex, or national origin." (34) Additionally, the law prohibits any rates that are "excessive, inadequate, or unfairly discriminatory." (35) Companies are free to use other factors to set rates, and any rates that are actuarially sound must be accepted by the state. (36) To help develop profitable rate schemes, insurance companies use proprietary algorithms based on historical claim factors that set premiums modeled on future claim forecasts. (37) These factors fall into two groups: socioeconomic and driving record factors. (38) Driving record factors include at-fault accidents and moving violations; socioeconomic factors include the level of education of the insured, occupation, homeownership status, prior purchase of insurance, and marital status. (39)

   California is the only state in the nation that bans the use of socioeconomic factors to calculate auto insurance premiums. (40) In 1988, California enacted Proposition 103 ("Proposition"), which bans the use of socioeconomic factors and ZIP Codes in rate-making, and it established an intervention process to motivate consumer participation in rate-making decisions. (41) The insurance companies fought the ban on the use of ZIP Codes, but the ban was eventually enacted thanks to the activism and persistence of its citizens. (42) A recent report found that over 100 billion dollars has been saved by California residents since the passage of Proposition 103. (43) From 1989 to 2010, Californians spent less than half of a percentage point more on insurance. (44) However, the rest of the country has had an increase of more than forty percent in insurance costs. (45) The intervenor program has been equally successful, saving Californians millions. (46) For example, Consumer Watchdog, a California intervenor since 2003, has saved Californians over two billion dollars by challenging the rates of over thirty insurance companies. (47) In Economic Empowerment Foundation v. Quackenbush, the California Appeals Court crystalized the intent of the Proposition in regards to the intervenor initiative: "The purpose of intervener fees is evidently to encourage consumers to participate in insurance rate proceedings by compensating them for their contribution." (48) While California encourages consumers to participate in the rate-making process and bans the use of single ZIP Codes and socioeconomic factors in premium calculations to great success, Florida has moved in the opposite direction with recent amendments to its insurance laws. (49)

   1. RATE-MAKING REGULATION AND FLORIDA STATUTE [section] 627.0651

      In March 2016, the Florida legislature amended the insurance laws of the state to allow the use of a single ZIP Code in rate-making schemes. (50) Previously, the use of two or more ZIP Codes was required, effectively spreading the risk among neighboring communities. (51) To illustrate, before this amendment, when you requested an insurance quote and provided your home ZIP Code, the rates you received were based on claim and risk data from two ZIP Codes, i.e., your home ZIP Code and a second neighboring one. (52) This restriction was enacted as an anti-redlining measure. (53) In drafting and passing this amendment, the legislature failed to consider Florida's history of racial segregation and the strict correlation between higher premiums and greater numbers of uninsured drivers. (54) This amendment was welcomed by groups that lobby for the insurance industry but denounced by consumer groups. (55)

      In Florida, the insurance industry is regulated by the Office of Insurance Regulation, (56) with the express mission of promoting "a stable and competitive insurance market for consumers." (57) This office enforces the insurance laws of the State as enacted by the Florida Legislature. (58) Insurance risk pools and rate schemes must be pre-approved by the Florida Office of Insurance Regulation. (59) Today, when you access a website or call for an auto insurance quote, the rates you receive are heavily regulated and follow strict price guidelines. (60) In addition to the prohibition on rate schemes that use race as a factor, the law further mandates that insurance pools must be divided "into geographical areas based upon hazards or expenses of claims." (61) The Office of Insurance Regulation provides the rules that insurers must follow when using other data--such as driving record, credit score, or a person's age--to calculate insurance rates. (62) However, Florida does not provide an intervenor reimbursement program to stimulate consumer participation in rate-making decisions, making participation economically prohibitive. (63)

      Allowing the use of a single ZIP Code in setting premiums disregards the geographical correlation between ZIP Code boundary lines and existing racial segregation in Census data. (64) Additionally, the legislature did not consider the results of similar single ZIP Code rate schemes in other states that resulted in higher insurance premium for all residents across ZIP Codes. (65) This amendment provides a loophole that insurance companies can use to abide by the prohibition on rate-setting based on race while at the same time engaging in practices that have a disparate impact on low income households through single ZIP Code rate schemes. (66)

   2. FLORIDA : A SHORT HISTORY OF SEGREGATION

      Florida's Commissioner of Insurance Regulation has admitted that Florida has a "checkered" history of allowing insurance companies to use race in setting insurance premiums. (67) The new amendment fails to account for a history of redlining and segregation in Florida. (68) When early Bahamians and freed Blacks arrived in Florida in the 1800s, they...