A leading U.S. consumer group Monday accused Geico Corp. (BRK) of using consumers' education backgrounds and occupations as criteria in setting auto insurance rates, resulting in discrimination against minorities and lower-income people.
The Consumer Federation of America (CFA) charged that the No. 4 U.S. auto insurer, has adopted rating methods and underwriting guidelines in 44 states that directly tie rates to education and occupation.
Geico, a unit of Berkshire Hathaway Inc. (BRK), the insurance and investment company controlled by billionaire Warren Buffett, rejected the charges. It called them "an offensive attempt to link fundamentally fair and actuarially sound industry practices with invidious discrimination."
The insurer provides auto insurance to more than 6 million policyholders, and insures more than 10 million vehicles.
Robert Hunter, the CFA's director of insurance and a former Texas insurance commissioner, called Geico's rate-setting policies an "underwriting sleight-of-hand" that can shortchange thousands of drivers.
Under Geico's guidelines, he said, a New Orleans factory worker without a high school education would pay $2,636 for insurance, 91 percent more the $1,382 that a white-collar worker with a graduate degree would pay for the same vehicle and location.
"There is clearly a disparate impact on minorities and lower income people," Hunter said in an interview. "If it isn't violative of the law, it should be. It strikes me as very unfair."
In a March 14 letter to the National Association of Insurance Commissioners, the CFA said Geico's use of educational status alone to determine rates allows it to bypass prohibitions on using income as a guideline for setting rates, on the grounds that doing so is racially discriminatory.
"What is very troubling is that Geico appears to be using these guidelines as a de facto rating method," it said. "Geico's methodology is reprehensible because not everyone has the opportunity or can afford to pursue a four-year college degree."
The CFA asked the NAIC to intervene before the practice, which it said other auto insurers are beginning to use, becomes more widespread.
Geico, responding in a March 17 letter to the NAIC, said the CFA's opinions are wrong from a public policy and legal perspective, and constitute a "full frontal attack" on market competition and consumer choice.