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Monitoring Availability and Affordability of Automobile Insurance

American Government Special Collections Reference Desk

American Government

Monitoring Availability and Affordability of Automobile Insurance

Michael T. McRaith
Department of the Treasury
13 July 2016


[Federal Register Volume 81, Number 134 (Wednesday, July 13, 2016)]
[Notices]
[Pages 45372-45381]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-16536]


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DEPARTMENT OF THE TREASURY


Monitoring Availability and Affordability of Automobile Insurance

AGENCY: Federal Insurance Office, Departmental Offices, Treasury.

ACTION: Notice; advising adoption of methodology to monitor 
affordability of personal automobile insurance.

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SUMMARY: The Federal Insurance Office (FIO) of the U.S. Department of 
the Treasury (Treasury) issues this notice pursuant to its authority to 
monitor the extent to which traditionally underserved communities and 
consumers, minorities, and low- and moderate-income (LMI) persons have 
access to affordable personal automobile insurance. In July 2015, FIO 
sought comments from stakeholders, including state insurance 
regulators, consumer organizations, representatives of the insurance 
industry, policyholders, academics, and others regarding: FIO's 
proposed working definition of ``affordability'' in relation to 
personal automobile insurance; the key factors FIO should use to 
calculate an affordability index for Affected Persons (e.g., premium, 
income, and other metrics); and how best to obtain appropriate data to 
monitor effectively the affordability of personal automobile insurance 
for Affected Persons. After carefully considering all the comments 
received in response to this and a previous solicitation, in 
conjunction with additional research and consultation, FIO has adopted 
a method to measure the affordability of automobile insurance for 
Affected Persons: FIO will calculate its Affordability Index by 
dividing the average (or mean) annual written personal automobile 
liability premium in the voluntary market by the median household 
income for U.S. Postal Service ZIP Codes (ZIP Codes) identified as 
being majority-minority or majority-LMI. FIO will presume that personal 
automobile liability insurance is affordable for Affected Persons if 
the Affordability Index is less than or equal to 2 percent.
    To undertake the study of the affordability of automobile insurance 
for Affected Persons, FIO will collect and analyze premium data 
received and aggregated by statistical agents. In addition, FIO will 
use data publicly available through the U.S. Census Bureau. In 
combination, these data sources should facilitate analysis necessary 
for FIO to monitor the affordability of personal auto insurance for 
Affected Persons. FIO will report its findings annually, and note, 
among other things, the trend of the Affordability Index relative to 
each of the ZIP Codes analyzed.

FOR FURTHER INFORMATION CONTACT: Lindy Gustafson, Federal Insurance 
Office, 202-622-6245 (not a toll free number).

SUPPLEMENTARY INFORMATION: 

I. Background

    Subtitle A of Title V of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act of 2010 (the Wall Street Reform Act) 
established FIO in Treasury and provides it with a number of 
authorities, including the authority to monitor the extent to which 
traditionally underserved communities and consumers, minorities, and 
low- and moderate-income (LMI) persons (collectively, Affected Persons) 
have access to affordable insurance products regarding all lines of 
insurance, other than health insurance.\1\
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    \1\ 31 U.S.C. 313(c)(1)(B).
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    In notices published in the Federal Register by FIO in April 2014 
(April 2014 Notice) \2\ and July 2015 (July 2015 Notice),\3\ FIO 
explained the reasons it is monitoring the availability and 
affordability of personal automobile liability insurance for Affected 
Persons. They are:
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    \2\ Monitoring Availability and Affordability of Auto Insurance, 
79 FR 19,969 (Apr. 10, 2014) (April 2014 Notice).
    \3\ Monitoring Availability and Affordability of Auto Insurance, 
80 FR 38,277 (Jul. 2, 2015) (July 2015 Notice).
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    1. Nearly all jurisdictions of the United States generally require 
a driver or owner of a motor vehicle to maintain automobile liability 
insurance or financial security that may be satisfied by automobile 
liability insurance and that is applicable at the time of an accident, 
while operating a motor vehicle, or at the time of registering a motor 
vehicle;

[[Page 45373]]

    2. On a nationwide basis, the percentage of uninsured motorists was 
approximately 14 percent between 2002 and 2009, before decreasing to 
12.3 percent in 2010, 12.2 percent in 2011, and 12.6 percent in 2012;
    3. Owning an automobile gives low-income commuters greater access 
to jobs since public ``transit only enables [low-income commuters] to 
reach less than one-third of metro-wide jobs within 90 minutes . . . 
while the automobile enables them to reach all jobs in the 51 largest 
metropolitan areas within 60 minutes;'' \4\ and
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    \4\ Clifford Winston, ``On the Performance of the U.S. 
Transportation System: Caution Ahead,'' Journal of Economic 
Literature, Vol. 51, No. 3 at 805 (2013) (citations omitted), 
available at https://www.aeaweb.org/articles?id=10.1257/jel.51.3.773.
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    4. Although some stakeholders have asserted that automobile 
insurance has become more affordable over time, representatives for 
consumers continue to assert that automobile insurance has become less 
affordable for Affected Persons.

A. The April 2014 Notice

    In the April 2014 Notice, FIO requested comments regarding, among 
other things: A reasonable and meaningful definition of affordability 
of personal automobile insurance, and the metrics and data FIO should 
use to monitor the extent to which Affected Persons have access to 
affordable personal automobile insurance.\5\
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    \5\ April 2014 Notice, supra note 2, at 19,970.
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B. The July 2015 Notice

    In the July 2015 Notice, FIO sought comments from the public on a 
framework for measuring the affordability of automobile insurance for 
Affected Persons. Based on comments submitted in response to the April 
2014 Notice, FIO proposed a working definition for affordable personal 
auto insurance based on an affordability index. To do that, the July 
2015 Notice set out in sequence: (1) A proposed definition of 
affordability; (2) a proposed definition and proposed calculation of an 
affordability index; (3) a proposed calculation of average premium; (4) 
a proposed definition of the market scope for an affordability index; 
and (5) a proposed definition of Affected Persons.\6\ Based on its 
consideration of those elements, FIO proposed the following working 
definition of affordable personal auto insurance:
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    \6\ July 2015 Notice, supra note 3.

    A personal auto[mobile] liability insurance policy is affordable 
if the annual premiums are within the financial means of most people 
as measured by an affordability index for Affected Persons in the 
standard market. Personal auto[mobile] liability insurance is 
presumed to be affordable if, with respect to household income, the 
affordability index does not exceed two percent for Affected Persons 
in urban areas, for LMI persons within a specific geographic area 
(including rural areas), or for all individuals in majority minority 
geographic areas.\7\
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    \7\ Id. at 38,280.
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i. The Definition of Affordability
    In developing its working definition of affordability, FIO 
considered three definitions submitted by commenters on the April 2014 
Notice and ultimately proposed adopting the definition of 
``affordability'' derived from a dictionary and submitted by one 
commenter: ``being within the financial means of most people.'' \8\ FIO 
explained that this ``common sense definition may be used to develop `a 
practical and effective approach to monitoring access to affordable 
personal auto[mobile] insurance.' '' \9\
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    \8\ Id. at 38,279.
    \9\ Id. (quoting Property and Casualty Insurers Association of 
America, at 1 (June 9, 2014), available at http://www.regulations.gov/#!documentDetail;D=TREAS-DO-2014-0001-0020).
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ii. Use of an Affordability Index
    FIO observed that some federal agencies use an index to measure 
affordability and provided examples. For instance, the U.S. Department 
of Housing and Urban Development (HUD) has a publicly available 
location affordability index that estimates the percentage of a 
family's income dedicated to the combined cost of housing and 
transportation in a given location.\10\ Additionally, the Consumer 
Financial Protection Bureau (CFPB) has a definition of ``qualified 
mortgage'' based, in part, on the ratio of the consumer's total monthly 
debt to total monthly income.\11\ Given the use of indices by other 
federal agencies, and FIO's statutory authority to monitor 
affordability for Affected Persons, FIO endorsed the concept of an 
affordability index for personal automobile insurance and proposed to 
calculate an affordability index for personal automobile insurance for 
Affected Persons.\12\
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    \10\ Id. at 38,279 & fn. 33 (citing HUD, ``Location 
Affordability Portal,'' available at http://www.locationaffordability.info/lai.aspx).
    \11\ 12 CFR 1026.43(e)(2)(vi).
    \12\ July 2015 Notice, supra note 3, at 38,279.
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iii. Average Premium
    FIO stated that an affordability index for Affected Persons may be 
derived from a broad set of criteria, such as the average premium for 
personal liability insurance, personal injury protection, comprehensive 
insurance, collision insurance, uninsured motorist insurance, and 
underinsured motorist insurance; or more narrow criteria, such as the 
average premium for personal automobile liability insurance for a given 
year.\13\ FIO proposed to limit the calculation of an affordability 
index to the average annual personal automobile liability insurance 
premium for Affected Persons after considering comments to the April 
2014 Notice. FIO chose this approach because states generally require 
the purchase of personal automobile liability insurance as a condition 
of driving or owning a motor vehicle.\14\
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    \13\ Id.
    \14\ Id. at 38,278. See also Insurance Information Institute, 
``Compulsory Auto/Uninsured Motorists'' (June 2016) (listing 
automobile financial responsibility limits and enforcement by 
state), available at http://www.iii.org/issue-update/compulsory-auto-uninsured-motorists. New Hampshire is the only state that does 
not require the purchase of personal automobile liability insurance; 
however, drivers must be able to demonstrate they are able to 
provide sufficient funds to meet New Hampshire Motor Vehicle 
Financial Responsibility Requirements in the event of an ``at-
fault'' accident. See State of New Hampshire Insurance Department, 
``Your Guide to Understanding Auto Insurance in the Granite State,'' 
at 1, available at http://www.nh.gov/insurance/consumers/documents/nh_auto_guide.pdf.
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    FIO noted that the affordability of personal automobile insurance 
may be calculated by an examination of the average premium calculated 
as either (1) the total annual written premium for all insurers writing 
personal automobile insurance divided by the total number of policies; 
or (2) the total annual premium quoted by a sample of insurers writing 
personal automobile insurance divided by the number of insurers in the 
sample. FIO proposed to use one or both of these average premium 
metrics for annual premium depending on available data sources.\15\
---------------------------------------------------------------------------

    \15\ July 2015 Notice, supra note 3, at 38,279.
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iv. Market Scope for an Affordability Index
    FIO explained that an affordability index may be calculated for the 
entire market for personal automobile liability insurance or a specific 
market within personal automobile insurance because, historically, the 
automobile insurance market has been divided into three segments: (1) 
The standard market; (2) the non-standard market; and (3) the residual 
market. FIO described the residual market as generally comprised of the 
highest risk drivers, i.e., drivers who do not qualify for personal 
automobile insurance offered in the standard market or non-standard 
market; the non-standard market as

[[Page 45374]]

comprised of high risk drivers, such as new drivers, drivers with 
moving violations, drivers with a rare or unusual motor vehicle, or 
drivers with a high automobile insurance policy cancellation or non-
renewal rate; and the standard market as comprised of all other 
drivers. FIO reported that generally annual premiums for personal 
automobile insurance are highest in the residual market, followed by 
the non-standard market, and, finally, the standard market.\16\ 
Accordingly, FIO proposed to limit the calculation of an affordability 
index for personal automobile liability insurance to the standard 
market in order to diminish the impact of the annual premiums charged 
to the highest risk drivers.
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    \16\ Id. at 38,820 & fn. 38, noting that, in 2011, of the 330 
insurers that wrote personal auto insurance in the standard and non-
standard market, 95 wrote personal auto insurance in the non-
standard market. Of the 95 insurers in the non-standard market, 15 
also wrote in the standard market. See StoneRidge Advisors, LLC, 
``Non-Standard Auto Insurance Market Overview & M&A Trends,'' View 
from the Ridge (August 2012), at 2, available at http://stoneridgeadvisors.com/Content/View_From_The_Ridge_August_2012.pdf.
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    In describing the framework that would be applied to determine 
whether personal automobile insurance is affordable, FIO examined the 
level of a person's income that should be devoted to that expenditure 
and cited to the suggestion by at least one commenter to the April 2014 
Notice, that personal automobile insurance is affordable if it does not 
claim more than 2 percent of a low-income family's take-home pay.\17\ 
FIO also cited another study of the affordability of personal 
automobile insurance that found the national average insurance 
expenditures divided by national median income has been below 2 percent 
since 1995.\18\ In addition, FIO also cited to a Current Employment 
Statistics (CES) report that found the average expenditure for all 
households for automobile insurance and the average income after taxes 
for all households, based on 2013 data, indicated that all consumers 
spent about 1.6 percent of average income after taxes on automobile 
insurance.\19\ Based on this analysis, FIO proposed to presume personal 
automobile liability insurance is affordable if, for Affected Persons, 
the affordability index is less than or equal to 2 percent of household 
income.\20\
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    \17\ July 2015 Notice, supra note 3, at 38,278.
    \18\ Id. at 38,280 (citing Insurance Research Council, Auto 
Insurance Affordability (November 2013), at 7).
    \19\ Id. at 38,280. Each month the Bureau of Labor Statistics' 
CES program surveys approximately 146,000 businesses and government 
agencies, representing approximately 623,000 individual worksites, 
in order to provide detailed industry data on employment, hours, and 
earnings of workers on nonfarm payrolls. See BLS, ``Current 
Employment Statistics--CES National,'' available at http://www.bls.gov/ces/.
    \20\ July 2015 Notice, supra note 3, at 38,280.
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v. Definition of Affected Persons
    FIO is statutorily authorized to monitor the extent to which 
traditionally underserved communities and consumers, minorities, and 
low- and moderate-income persons have access to affordable insurance 
products. FIO adopted the term ``Affected Persons'' to describe 
traditionally underserved communities and consumers, minorities, and 
low- and moderate-income (LMI) persons.
    FIO initially proposed to use ``urban area,'' as defined by the 
U.S. Census Bureau (Census Bureau), as a proxy for traditionally 
underserved communities and consumers.\21\
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    \21\ Id. (proposing to define urban area as densely developed 
territory that encompasses at least 2,500 people, of which at least 
1,500 reside outside the institutional group quarters. See Census 
Bureau, ``2010 Census Urban Area FAQs,'' available at https://www.census.gov/geo/reference/ua/uafaq.html).
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    FIO then proposed to define LMI by adapting the definitions used by 
the Federal Deposit Insurance Corporation (FDIC), which defines low-
income as ``individuals and geographies having a median family income 
less than 50 percent of the area median income'' and moderate-income as 
``individuals and geographies having a median family income of at least 
50 percent and less than 80 percent of the area median income.'' \22\ 
``The area median income is: (1) The median family income for the 
[metropolitan statistical area]; or (2) the statewide non-metropolitan 
median family income, if a person or geography is located outside a 
[metropolitan statistical area].'' \23\ FIO proposed to adapt this 
definition by using median household income as defined and identified 
by the Census Bureau,\24\ instead of median family income, in its study 
of affordability of personal automobile insurance. Accordingly, FIO 
proposed to define LMI persons as ``individuals living in areas where 
the annual income of the geographic area is less than 80 percent of the 
median household income of a metropolitan statistical area or state.'' 
\25\
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    \22\ July 2015 Notice, supra note 3, at 38,280 & fn. 41 (quoting 
FDIC, ``Community Reinvestment Act (CRA) Performance Ratings,'' 
available at https://www5.fdic.gov/crapes/peterms.asp).
    \23\ Id.
    \24\ Id. at 38,280 & fn. 43, noting that household income 
includes income received on a regular basis by the householder and 
all other individuals 15 years of age and older in the household, 
whether related to the householder or not. It does not include 
capital gains or noncash benefits. According to the Census Bureau, 
``respondents report income earned from wages or salaries much 
better than other sources of income and that the reported wage and 
salary income is nearly equal to independent estimates of aggregate 
income.'' Census Bureau, ``About Income,'' available at https://www.census.gov/hhes/www/income/about/.
    \25\ July 2015 Notice, supra note 3, at 38,280.
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    FIO noted that the term ``minorit[y]'' is defined by law as ``Black 
American, Native American, Hispanic American, or Asian American.'' \26\ 
It proposed to use ZIP Codes in which the minority population exceeds 
50 percent as the standard for majority-minority geographic areas.
---------------------------------------------------------------------------

    \26\ 31 U.S.C. 313(c)(1)(B) (incorporating by reference the 
definition established in 12 U.S.C. 1811, note).
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vi. Data Source and Request for Comments
    FIO concluded the July 2015 Notice by describing the data needed to 
conduct its study, and sought opinions on how best to collect that 
information. FIO explained that it considered the currently available 
data relating to premiums for personal automobile insurance and 
concluded that the data is inadequate for FIO to monitor the extent to 
which Affected Persons have access to affordable personal automobile 
insurance.\27\ FIO stated that insurers have the most complete and 
accurate information that would allow it to perform its function of 
monitoring the extent to which Affected Persons have access to 
affordable automobile insurance and would be able to provide accurate 
price quotes for a given profile of a driver, including for a specific 
geographic area.\28\ In addition, FIO noted, insurers have the 
information to calculate the average annual premium for liability 
coverage for personal automobile liability insurance in the standard 
market for urban areas, and areas where the majority of residents are 
minorities or LMI persons.\29\
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    \27\ July 2015 Notice, supra note 3, at 38,280.
    \28\ Id. at 38,281.
    \29\ Id.
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    Finally, FIO again requested that commenters provide feedback on 
the following:
    1. FIO's proposed working definition of ``affordability'' in 
relation to personal automobile insurance;
    2. The key metrics FIO proposes to use to calculate an 
affordability index for Affected Persons (e.g., premium, income, and 
other metrics); and
    3. The best approach for FIO to obtain appropriate data to monitor 
effectively the affordability of personal automobile insurance for 
Affected Persons.\30\
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    \30\ Id.

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[[Page 45375]]

II. Final Working Definition of Affordable Personal Auto Insurance

    After considering all the comments received--to both the April 2014 
and July 2015 Notices \31\--and after undertaking additional research 
and stakeholder consultation, FIO has adopted a final working framework 
to study the affordability of personal auto insurance for Affected 
Persons. Personal auto liability insurance is presumed to be affordable 
if using an affordability index that is calculated by dividing the 
average annual written personal automobile liability premium in the 
voluntary market by the median household income for ZIP Codes 
identified as being majority-minority or majority-LMI, the 
Affordability Index does not exceed 2 percent.
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    \31\ Eighteen comments were submitted in response to the April 
2014 Notice and 11 submitted in response to July 2015 Notice. All 
comments are available through www.regulations.gov.
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    In adopting this final working definition, FIO has made some 
changes to the proposed working definition from the July 2015 Notice 
based on comments and additional research. First, FIO will use the 
average annual written personal automobile liability premium in the 
voluntary market to calculate the Affordability Index. Second, FIO has 
adopted a different method of defining and accounting for Affected 
Persons to reflect issues with measuring traditionally underserved 
communities. Third, FIO has clarified that, to calculate the 
Affordability Index, FIO will use median household income data for ZIP 
Codes identified as majority-minority and majority-LMI areas. Finally, 
FIO has concluded that, based on comments and its additional research 
and consultation, all other aspects of the working definition are 
adopted as proposed.

A. Elements of Working Definition of Affordable Personal Automobile 
Liability Insurance for Affected Persons

    For its final working definition, FIO has adopted an index to 
measure the affordability of automobile insurance for Affected Persons. 
FIO's Affordability Index will be calculated as the average annual 
written personal automobile liability premium in the voluntary market 
divided by the median household income for the ZIP Codes identified as 
majority-minority and majority-LMI.
i. Affordability Index
    Based on comments received in response to the July 2015 Notice, 
insurers generally oppose the concept of using an affordability index 
to measure affordability for each category of Affected Persons. The 
Financial Services Roundtable (FSR) commented that a ``mathematical 
index . . . attempts to reduce a myriad of complex factors into a 
single `one-size fits all' formula,'' and ``is inappropriate, 
insufficient, and perhaps even misleading as a measure of auto 
insurance affordability.'' \32\ The Property and Casualty Insurers 
Association of America (PCI) commented that an ``affordability index 
does not consider that insurers have little or no control over the 
costs that drive auto insurance premiums and the `pass through' nature 
of the insurance mechanism.'' \33\ Meanwhile, the National Association 
of Professional Insurance Agents (PIA) commented that ``attempts to 
define affordability as a fixed measure of income, [do] not give an 
accurate assessment of the non-insurance related factors--such as state 
tort law and highway safety measures--that impact insurance prices.'' 
\34\ Two groups of consumer advocates that provided comments--the 
Consumer Federation of America (CFA) and New Yorkers for Responsible 
Lending (NYRL)--support the creation and use of an affordability index 
to define affordability.\35\ CFA commented that it supports ``an 
affordability index that defines affordability as a . . . percentage of 
a household's annual income.'' \36\ NYRL commented that ``an 
affordability index is an effective way to evaluate the affordability 
of personal auto insurance'' and ``should be based on the cost of auto 
insurance as percentage of income.'' \37\ The Insurance Research 
Council (IRC) also offered support, acknowledging that an affordability 
index can be a useful method for monitoring affordability over 
time.\38\ In an August 2015 IRC Study, Trends in Auto Insurance 
Affordability (the IRC 2015 Study), the IRC used ``expenditure and 
income data to form the IRC's expenditure-to-income ratio.'' \39\
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    \32\ FSR, at 2, 7 (August 31, 2015), available at http://www.regulations.gov/#!documentDetail;D=TREAS-DO-2015-0005-0011 (FSR 
Comment).
    \33\ PCI, at 2 (August 13, 2015), available at http://www.regulations.gov/#!documentDetail;D=TREAS-DO-2015-0005-0006 (PCI 
Comment).
    \34\ PIA, at 2 (August 28, 2015), available at http://www.regulations.gov/#!documentDetail;D=TREAS-DO-2015-0005-0004 (PIA 
Comment).
    \35\ CFA, at 1 (August 31, 2015), available at http://www.regulations.gov/#!documentDetail;D=TREAS-DO-2015-0005-0014 (CFA 
Comment): NYRL, at 1 (August 31, 2015), available at http://www.regulations.gov/#!documentDetail;D=TREAS-DO-2015-0005-0010 (NYRL 
Comment). ``CFA'' includes all signatories to the comment letter--10 
national groups (Americans for Financial Reform; Consumer Action; 
Consumer Federation of America; Consumers Union; NAACP; National 
Association of Consumer Advocates; National Consumer Law Center, on 
behalf of its low-income clients; National Council of LaRaza; U.S. 
PIRG, and United Policyholders) as well as 39 state groups from 
Alaska, California, Delaware, Florida, Georgia, Illinois, Indiana, 
Kentucky, Maine, Maryland, Massachusetts, Minnesota, Mississippi, 
Montana, New Jersey, New York, North Carolina, Ohio, Oregon, 
Pennsylvania, Utah and Virginia.
    \36\ CFA Comment, supra note 37, at 2.
    \37\ NYRL Comment, supra note 37, at 1.
    \38\ IRC, at 1 (August 28, 2015), available at http://www.regulations.gov/#!documentDetail;D=TREAS-DO-2015-0005-0005 (IRC 
Comment).
    \39\ IRC 2015 Study at 17, summary available at http://www.insurance-research.org/research-publications/trends-auto-insurance-affordability.
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    FIO acknowledges the various objections to adopting an 
affordability index as a tool to measure and evaluate the affordability 
of personal automobile insurance. FIO recognizes that some commenters 
view an index as reducing a myriad of complex factors into a single 
formula,\40\ or that an index, potentially, disregards non-insurance 
factors such as state tort law and highway safety measures.\41\ 
However, FIO is influenced by the established practices of other 
federal agencies that use indices to measure affordability, and for 
other purposes. Significantly, HUD created the Location Affordability 
Index to provide estimates of the percentage of a family's income 
dedicated to the combined cost of housing and transportation in a given 
location.\42\ Furthermore, FIO notes that the Bureau of Labor 
Statistics (BLS) in the U.S. Department of Labor (DOL) has long 
produced the Consumer Price Index (CPI), the most widely used measure 
of inflation, which provides information about price changes in the 
U.S. economy,\43\ while the U.S. Department of Commerce, Bureau of 
Economic Analysis produces the Personal Consumption Expenditure Price 
Index (PCE),\44\ generally thought to be ``the single most 
comprehensive and theoretically compelling measure of consumer 
prices.'' \45\ And, even within the private sector, the National 
Association of Realtors produces the monthly Housing Affordability 
Index, which provides a way to track over time

[[Page 45376]]

whether housing is becoming more or less affordable for the typical 
household.\46\ Finally, the IRC produces its own automobile insurance 
affordability index.\47\
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    \40\ FSR Comment, supra note 34, at 2.
    \41\ PIA Comment, supra note 36, at 2.
    \42\ Additional details about the HUD Location Affordability 
Index are available at http://www.locationaffordability.info/default.aspx.
    \43\ Additional information about the Consumer Price Index is 
available at http://www.bls.gov/cpi/home.htm.
    \44\ Additional information about the Personal Consumption 
Expenditure Price Index is available at http://www.bea.gov/faq/index.cfm?faq_id=518.
    \45\ Craig S. Hakkio, ``PCE and CPI Inflation Differentials: 
Converting Inflation Forecasts,'' Economic Review, at 51 (Federal 
Reserve Bank of Kansas City 2008), available at https://www.kansascityfed.org/publicat/econrev/pdf/1q08hakkio.pdf.
    \46\ Additional information about the Housing Affordability 
Index is available at http://www.realtor.org/topics/housing-affordability-index.
    \47\ IRC 2015 Study, supra note 41.
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    FIO notes the persuasive precedent of federal agencies using 
indices to measure affordability, among other economic measures, and 
agrees with those commenters who assert that an affordability index is 
an effective and meaningful way to measure and evaluate the 
affordability of personal automobile insurance. Furthermore, as FIO 
discussed in the July 2015 Notice, other federal agencies use indices 
to measure other kinds of affordability. Accordingly, given FIO's 
statutory authority to monitor affordability for Affected Persons, FIO 
confirms the adoption and use of the Affordability Index. FIO 
recognizes that an index does not address affordability for any 
individual consumer but that it is a tool that will help monitor over 
time the changes and trends in automobile liability insurance premiums 
for Affected Persons as a group. Consistent with its statutory 
authority, FIO will limit the application of the Affordability Index 
and evaluate affordability only for Affected Persons.
ii. Average Premium
    FIO stated in the July 2015 Notice that an affordability index may 
be calculated using the average annual written personal automobile 
liability premium.\48\ The July 2015 Notice sought comment on the 
appropriate method of calculating the average premium and the types of 
policies included in the calculation.
---------------------------------------------------------------------------

    \48\ July 2015 Notice, supra note 3, at 38,279.
---------------------------------------------------------------------------

    Three commenters specifically addressed the appropriateness of 
using the average premium price at all. The American Insurance 
Association (AIA) commented that average premiums should not be used to 
calculate an affordability index because doing so would reflect a 
population, even among Affected Persons, who choose to buy higher 
limits, adjust their deductible, or have multiple household drivers or 
vehicles on a single policy.\49\ In contrast, the American Academy of 
Actuaries (AAA) took the opposite view and commented ``that an 
appropriate measure of affordability of automobile insurance would be 
to compare average premium to average income.'' \50\
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    \49\ AIA, at 3 (Aug. 31, 2015), available at http://www.regulations.gov/#!documentDetail;D=TREAS-DO-2015-0005-0009 (AIA 
Comment).
    \50\ AAA, at 1 (Aug. 31, 2015), available at http://www.regulations.gov/#!documentDetail;D=TREAS-DO-2015-0005-0012 (AAA 
Comment).
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    In its comment, the PIA recommended using the median rather than 
the average, as it is a more precise measure because ``[e]ven when 
limiting consideration to personal auto[mobile] liability in the 
standard market, consumer choices and insurance practices will skew 
average results in certain areas of the country.'' \51\ Although a 
median might be a more precise measure than an average, it would 
require collection of data that is not readily available and that 
therefore might place an undue burden on the collecting agencies, 
insurers, and others.
---------------------------------------------------------------------------

    \51\ PIA Comment, supra note 36, at 3.
---------------------------------------------------------------------------

    After reviewing the comments, and taking into consideration the 
varying perspectives on whether to use the average premium cost, FIO 
has concluded that using an average premium price is appropriate to 
calculate the Affordability Index. FIO will use average premium price 
data for the purpose of calculating the Affordability Index because of 
the following factors: (1) Average premium data is more frequently 
collected; \52\ (2) additional conversations with industry participants 
have mitigated concerns of skewness in the premium distribution; and 
(3) using average premium data will reduce the reporting and 
computational burden on participating insurers and statistical agents.
---------------------------------------------------------------------------

    \52\ A recent study on auto insurance affordability similarly 
focused on average premiums because national and state insurance 
expenditure data was ``only available as an average.'' Patrick 
Schmid, ``Auto Insurance Affordability,'' Journal of Insurance 
Regulation, vol. 33, no. 9, at 4 & fn.5 (2014), available at http://www.naic.org/documents/prod_serv_jir_JIR-ZA-33-09-EL.pdf.
---------------------------------------------------------------------------

    In the July 2015 Notice, FIO proposed two ways to calculate average 
premium: (1) Average annual written premium for all insurers writing 
personal auto insurance or (2) average quoted premium for a sample of 
insurers. Allstate was the only industry commenter to specifically 
address the issue of using written or quoted premiums. In its comment, 
Allstate recommended ``using actual total premiums written'' because 
that information is collected by state insurance departments and the 
National Association of Insurance Commissioners (NAIC). It stated 
further that ``[t]he collection of quote information . . . would 
necessitate the development of `hypothetical' customers who may or may 
not be representative of the people purchasing insurance in a 
particular area.'' \53\ Consumer advocates objected to the use of 
written premium over quoted premium, expressing concerns that using the 
actual prices paid for coverage, i.e., written premiums, does not 
provide a good measure of affordability because some consumers will not 
purchase insurance upon receiving quotes that are too expensive.\54\ 
Accordingly, consumer advocates recommended that FIO analyze data to 
reflect the premiums actually offered or presented to, rather than the 
premiums paid by, Affected Persons.\55\
---------------------------------------------------------------------------

    \53\ Allstate, at 6 (August 27, 2015), available at http://www.regulations.gov/#!documentDetail;D=TREAS-DO-2015-0005-0003 
(Allstate Comment).
    \54\ See CFA Comment, supra note 37, at 6-7; NYRL Comment, supra 
note 37, at 5-6.
    \55\ Id.
---------------------------------------------------------------------------

    FIO will use written premium, not quoted premium, in this final 
working definition. One commenter supporting using quoted premium has 
previously acknowledged its drawbacks. In a September 2014 study, the 
Consumer Federation of America opined that collecting premium quotes 
from Web sites has several limitations such as (1) not all insurers' 
Web sites provide quotes; (2) a quote may be higher or lower than the 
actual price a consumer would pay depending on credit record; and, (3) 
because quotes must be collected manually, it is difficult to collect 
premium information for a large number of geographies or driver 
profiles.\56\ Although commenters make a reasonable argument for 
gauging affordability based on quoted premiums, the drawbacks 
identified in the 2014 study and by commenters dictate use of annual 
written premium, not annual quoted premium, in the calculation of the 
Affordability Index.
---------------------------------------------------------------------------

    \56\ Tom Feltner, Stephen Brobeck, & J. Robert Hunter, The High 
Price of Mandatory Auto Insurance for Lower Income Households: 
Premium Price Data for 50 Urban Regions, at 3-4 (Consumer Fed. of 
America Sept. 2014), available at http://www.consumerfed.org/pdfs/140929_highpriceofmandatoryautoinsurance_cfa.pdf.
---------------------------------------------------------------------------

    Commenters were divided on FIO's proposal to limit its analysis to 
only the premium for liability coverage and not consider comprehensive, 
collision or other costs associated with personal auto insurance. 
Comments from consumer advocates expressed concerns about this 
approach's exclusion of comprehensive and collision coverage costs from 
an affordability index calculation.\57\ Both CFA and NYRL commented 
that premiums for comprehensive and collision coverage should be 
included in calculating an

[[Page 45377]]

affordability index because ``a rising number of low- to moderate-
income drivers have car loans that require additional insurance 
coverage.'' \58\ In addition, CFA noted that this coverage costs 
``approximately the same amount as the basic liability policy offered 
by a company,'' \59\ while NYRL commented that the cost of 
comprehensive and collision coverage ``puts an additional burden on the 
driver who may make just enough to make the car payment'' \60\ and, 
therefore, should be included in calculation of an affordability index. 
The National Association of Mutual Insurance Companies (NAMIC) 
commented that limiting the scope of an affordability index to 
liability insurance would lead to data quality problems because state 
minimums vary and some states require personal injury protection 
(PIP).\61\
---------------------------------------------------------------------------

    \57\ CFA Comment, supra note 37, at 3; NYRL Comment, supra note 
37, at 3-4.
    \58\ NYRL Comment, supra note 37, at 4. See also CFA Comment, 
supra note 37, at 3.
    \59\ CFA Comment, supra note 37, at 3.
    \60\ NYRL Comment, supra note 37, at 4.
    \61\ See NAMIC, at 5 (August 31, 2015) available at http://www.regulations.gov/#!documentDetail;D=TREAS-DO-2015-0005-0007 
(NAMIC Comment).
---------------------------------------------------------------------------

    Other commenters--AAA, Allstate, PIA, and PCI--submitted comments 
supporting FIO's view that an affordability index should measure only 
the cost of mandatory liability coverage. The AAA commented that the 
``optional [c]omprehensive and [c]ollision coverage should not be 
included'' in an affordability index.\62\ Allstate commented that 
``[i]nsurance expenditure should be adjusted to reflect the minimum 
coverage required; [because] it is likely that Affected Persons 
purchase lower coverage limits, which reduces the amount they spend on 
insurance relative to the average insurance consumer.'' \63\ PIA 
commented that FIO should consider ``only personal auto liability 
insurance in the standard market.'' \64\ PCI commented that only ``the 
mandatory personal auto liability '' coverage for bodily injury and 
property damage should be included because ``states generally require 
only the purchase of liability insurance as a condition of driving or 
owning a motor vehicle.'' \65\ As explained in the July 2015 Notice, 
because liability coverage (or financial responsibility limit) is the 
only requirement imposed by states as a condition of driving or owning 
an automobile, FIO concludes that liability coverage should be the 
basis for calculating the Affordability Index. Many variables affect 
consumers' decisions on the amount of collision and/or comprehensive 
coverage to purchase. For example, risk-averse consumers or consumers 
seeking asset protection may purchase the maximum amount of coverage 
available, while risk-tolerant consumers may purchase only the 
mandatory minimums. By including collision or comprehensive coverage in 
its calculation of the Affordability Index, FIO would introduce 
unnecessary confounding variables unrelated to affordability into an 
already complex analysis. For these reasons, FIO will limit the 
calculation of the Affordability Index solely to premiums for mandatory 
liability coverage.
---------------------------------------------------------------------------

    \62\ AAA Comment, supra note 52, at 1.
    \63\ Allstate Comment, supra note 55, at 2.
    \64\ PIA Comment, supra note 36, at 2.
    \65\ PCI Comment, supra note 35, at 2.
---------------------------------------------------------------------------

iii. Market Scope
    Commenters were split on the issue of limiting the calculation of 
affordability to the standard market only. As explained by FIO in the 
July 2015 Notice, an affordability index may be calculated for the 
entire market for personal automobile liability insurance or a specific 
market within personal automobile insurance.\66\ FIO explained that 
generally, annual premiums for personal automobile insurance are 
highest in the residual market, followed by the non-standard market, 
and then the standard market.\67\ FIO proposed to use only premiums in 
the standard market in order to diminish the impact of the higher 
annual premiums charged to the highest risk drivers in the other 
markets.
---------------------------------------------------------------------------

    \66\ July 2015 Notice, supra note 3, at 38,280.
    \67\ Id.
---------------------------------------------------------------------------

    Consumer advocates opposed the use of only data from the standard 
market and, rather, proposed including data from the non-standard and 
residual market as well.\68\ CFA commented that residual and non-
standard market should be included in an affordability index ``because 
both of those markets serve, to some extent, good drivers who are 
Affected Person.'' \69\ NYRL commented that data should include 
residual market and non-standard premiums because ``good drivers are 
being placed in non-standard markets as a result of socioeconomic 
factors.'' \70\ Other commenters supported FIO using only standard 
market data. The AAA and PIA stated that only data from the standard 
market should be considered in calculating an affordability index.\71\ 
The PIA commented that using data in the standard market will 
``diminish the impact of annual premiums charged to high-risk drivers 
as well as state laws and other requirements.'' \72\
---------------------------------------------------------------------------

    \68\ CFA Comment, supra note 37, at 5-6; NYRL Comment, supra 
note 37, at 4.
    \69\ CFA Comment, supra note 37, at 5.
    \70\ NYRL Comment, supra note 37, at 4.
    \71\ AAA Comment, supra note 52, at 1; PIA Comment, supra note 
36, at 2.
    \72\ PIA Comment, supra note 36, at 2.
---------------------------------------------------------------------------

    Notwithstanding the conflicting views, FIO notes that insurers 
generally use varying methodologies to rate policyholders who qualify 
for standard market premiums versus those who do not. For this reason, 
the exact size of the standard and the non-standard auto market is hard 
to calculate. The potential impact of excluding premium data for the 
non-standard market--estimated at 30 to 40 percent of the total private 
passenger auto insurance market \73\--when calculating the 
Affordability Index is significant. Accordingly, FIO will use data for 
both the standard and non-standard market to calculate the 
Affordability Index. As a result, FIO will capture relevant data, while 
addressing the concerns of consumer advocates that ``good drivers are 
being placed in non-standard markets as a result of socioeconomic 
factors.'' \74\ For present purposes, FIO will refer to the standard 
and non-standard market collectively as the ``voluntary market,'' to 
distinguish it from the residual market and state assigned risk pools.
---------------------------------------------------------------------------

    \73\ Andrea Wells, ``Nonstandard Auto Insurance Market Is Not 
For Everybody,'' Insurance Journal (April 13, 2015), available at 
http://www.insurancejournal.com/news/national/2015/04/13/364065.htm.
    \74\ NYRL Comment, supra note 37, at 4.
---------------------------------------------------------------------------

iv. Affected Persons
    FIO has revised its definition of Affected Persons. In the July 
2015 Notice, FIO adopted the term ``Affected Persons'' to collectively 
refer to ``traditionally underserved communities and consumers, 
minorities, and low- and moderate-income persons.'' FIO then proposed 
an approach to account for such persons in its working definition. 
First, FIO proposed to use ``urban area'' as the proxy for defining 
``traditionally underserved communities and consumers,'' following the 
Census Bureau definition of urban area, ``as densely developed 
territory that encompasses at least 2,500 people of which at least 
1,500 reside outside institutional group quarters.'' \75\ Second, 
adapting the FDIC definitions for low-income and moderate-income, FIO 
proposed, for purposes of its definition of LMI, to consider 
individuals living in areas where the annual income of the geographic 
area is less than 80 percent of the median household income of a

[[Page 45378]]

metropolitan statistical area or state.\76\ In explaining its decision, 
FIO noted that the FDIC defines low-income as ``individuals and 
geographies having a median family income less than 50 percent of the 
area median income'' and moderate income as ``individuals and 
geographies having a median family income of at least 50 percent and 
less than 80 percent of the area median income.'' \77\ Third, FIO noted 
that ``minorit[y]'' is defined by law as ``Black American, Native 
American, Hispanic American, or Asian American,'' which is the 
definition incorporated by reference in the Wall Street Reform Act.\78\ 
In addition, FIO proposed to use ZIP Codes in which the minority 
population exceeded 50 percent as the standard for majority-minority 
geographic areas.\79\
---------------------------------------------------------------------------

    \75\ July 2015 Notice, supra note 3, at 38,280; Census Bureau, 
``2010 Census Urban Area FAQs,'' available at https://www.census.gov/geo/reference/ua/uafaq.html.
    \76\ Id.
    \77\ Id. (citing FDIC, ``Community Reinvestment Act (CRA) 
Performance Ratings,'' available at https://www2.fdic.gov/crapes/peterms.asp).
    \78\ Id. (citing 31 U.S.C. 313(c)(1)(B) (incorporating by 
reference the definition established in 12 U.S.C. 1811 note)).
    \79\ Id.
---------------------------------------------------------------------------

    FIO received several comments in response to the July 2015 Notice 
regarding its proposed definition and parameters to account for 
Affected Persons. One comment encouraged FIO to define Affected Persons 
broadly in order to include communities that are marginalized because 
of factors beyond income.\80\ Two commenters opined that using 
geographic areas to identify Affected Persons may be the most practical 
way to approach the affordability analysis, with one of those 
respondents suggesting the use of ZIP Codes as the measurement of 
geographic area.\81\ Another commenter cautioned that the use of 
``urban areas'' as a proxy for ``traditionally underserved 
communities'' would create a statistical category covering over 80 
percent of the U.S. population, as over 250 million people live in 
``urban areas.'' \82\ Another commenter stated that the proposed 
definition for Affected Persons would be unmanageable because it would 
combine populations (LMI and minorities) with multiple and overlapping 
geographic units (i.e., ZIP Codes and Census Bureau ``urban 
areas'').\83\ Relatedly, a letter by the Ranking Member of the U.S. 
House of Representatives Financial Services Committee, Congresswoman 
Maxine Waters, to FIO Director Michael McRaith, cautioned against the 
use of ``urban areas'' as a proxy for ``traditionally underserved 
communities'' because that term would exclude rural areas and could 
unduly skew data because of the presence of high-income households in 
high-density urban areas.\84\ Finally, a commenter warned that many 
states prohibit insurers from collecting data on income, race, 
religion, national origin, sex, familial status, or disability; 
insurers do not want to collect such data; and any requirement that 
insurers collect such data could create conflicting regulatory 
requirements.\85\
---------------------------------------------------------------------------

    \80\ NYRL Comment, supra note 37, at 1.
    \81\ Allstate Comment, supra note 55, at 6; CFA Comment, supra 
note 37, at 4-5.
    \82\ FSR Comment, supra note 34, at 8.
    \83\ IRC Comment, supra note 40, at 2.
    \84\ Ranking Member Waters letter to Director McRaith, re FIO's 
efforts to monitor the availability and affordability of automobile 
insurance (November 19, 2015) (Waters' Letter).
    \85\ AIA Comment, supra note 51, at 3.
---------------------------------------------------------------------------

    FIO agrees with the commenters who suggested that its earlier 
proposal to use the Census Bureau-defined term ``urban areas'' as a 
proxy for identifying ``traditionally underserved communities 
(including rural areas) and consumers'' would fail to adequately 
capture and account for Affected Persons. Using ``urban areas'' as a 
proxy raises two significant concerns. First, the proposed proxy is 
over-inclusive because ``urban areas'' account for over 80 percent of 
the U.S. population.\86\ This level of coverage could capture numerous 
communities and consumers that would not meet any reasonable definition 
of traditionally underserved. Second, the proxy would exclude rural 
communities. The CFA commented that FIO could attempt to use ZIP Codes 
with high levels of uninsured motorists as a proxy to identify 
``underserved'' areas, but conceded that even that data is not easily 
obtained, and noted that ``LMI ZIP Codes and majority minority ZIP 
Codes'' sufficiently capture those communities that would be properly 
considered ``underserved'' in this context.\87\
---------------------------------------------------------------------------

    \86\ FSR Comment, supra note 34, at 8-9 & fn.22.
    \87\ CFA Comment, supra note 37, at 5.
---------------------------------------------------------------------------

    The Wall Street Reform Act does not provide a definition of 
``traditionally underserved communities and consumers'' or a 
methodology for identifying such communities or consumers. Likewise, 
the legislative history of the statute does not establish a clear or 
specific Congressional intent as to the meaning of the phrase.\88\ 
Given the lack of a statutory definition and an acceptable working 
definition and parameters for ``traditionally underserved communities 
and consumers,'' FIO reexamined the approach to the definition and 
parameters for Affected Persons as a whole and agrees with the 
observations of CFA about the challenges of defining ``underserved'' 
areas. Accordingly, in lieu of using urban areas as a proxy for 
identifying underserved communities as previously proposed, FIO adopts 
the approach recommend by CFA and instead will use ``LMI ZIP Codes and 
majority minority ZIP Codes'' \89\ to capture those communities that 
would be considered underserved.
---------------------------------------------------------------------------

    \88\ FIO notes that the CFPB has adopted a definition for 
``underserved.'' According to the CFPB regulation at 12 CFR 
1026.35(b)(2)(iv)(B): A county is ``underserved'' during a calendar 
year if, according to Home Mortgage Disclosure Act data for the 
preceding calendar year, no more than two creditors extended covered 
transactions, as defined in Sec.  1026.43(b)(1), secured by a first 
lien, 5 or more times in the county. FIO has not adopted this 
approach because it is not well suited to insurance.
    \89\ CFA Comment, supra note 37, at 5.
---------------------------------------------------------------------------

    Based on stakeholder comments and its own research, FIO affirms the 
validity of the definition and parameters it adopted for identifying 
minority and LMI populations subject to the refinements discussed 
below. FIO will use the definition of minority set by law as ``Black 
American, Native American, Hispanic American, or Asian American.'' FIO 
has revised its adaptation of the FDIC methodology it proposed in the 
July 2015 Notice for identifying LMI persons. Following more precisely 
the practice of the FDIC, FIO will use median family income for 
designating LMI geographies instead of using median household 
income.\90\ FIO makes this change for two reasons: (1) Aggregated non-
MSA \91\ median household income data is not readily available, and (2) 
existing regulatory frameworks tend to use median family income data 
instead of median household income when analyzing geographic areas. For 
example, the Federal Financial Institutions Examination Council 
produces annual data tables by MSA, metropolitan division (MD), and 
non-MSA using family income for the Community Reinvestment Act (CRA) 
examination of banks.\92\ As noted above, the FDIC uses median family 
income to designate low- and moderate-income individuals and 
geographies. The lack of aggregated household income data for non-MSA 
areas would pose a challenge for FIO to readily identify rural LMI 
areas. Therefore, FIO will use median family

[[Page 45379]]

income and not median household income to identify LMI geographies.
---------------------------------------------------------------------------

    \90\ This definition is based on the definition used in the 
Community Reinvestment Act examination and accepted and implemented 
by the Community Development Block Grant program, FDIC, Federal 
Reserve Board of Governors, Office of the Comptroller of the 
Currency, and the Federal Financial Institutions Examination 
Council.
    \91\ An ``MSA'' is a metropolitan statistical area as defined by 
the Director of the Office of Management and Budget.
    \92\ See, e.g., 12 CFR part 345, 12 CFR 228.12, and 12 CFR part 
25.
---------------------------------------------------------------------------

    Accordingly, FIO will adopt the revised definition and parameters 
in its final working definition to account for Affected Persons as (1) 
persons living in majority-minority ZIP Codes, and (2) persons living 
in majority-LMI ZIP Codes.\93\ FIO believes that this approach results 
in a more workable framework while still reflecting the intent of the 
statute to monitor ``traditionally underserved communities and 
consumers.''
---------------------------------------------------------------------------

    \93\ This definition will capture Affected Persons in both rural 
and urban areas.
---------------------------------------------------------------------------

    The Affordability Index is calculated as premiums divided by 
income. In essence, it measures insurance expenditure expressed as 
percentage relative to income. While FIO's authority is to monitor the 
availability and affordability of insurance for Affected Persons, an 
automobile insurance premium study is most useful if linked to 
geography. This fact supports using majority-minority ZIP Codes and 
majority-LMI ZIP Codes as parameters to account for Affected Persons. 
FIO does not have ready access to individual insurance premium 
experiences and corresponding personal demographics data and, as 
commenters have pointed out, it is unlikely that insurers and 
statistical agents have this demographic data. Consistent with the 
reasoning in the July 2015 Notice, aggregate geographic areas can act 
as useful proxies to account for Affected Persons. In lieu of obtaining 
individualized data that may not be maintained by insurers, ZIP Code 
provides the closest proxy for observing the experiences of Affected 
Persons within discrete measurable geographic areas for which data is 
collected and available.\94\ Insurers acquire data to set premiums and, 
in so doing, capture policyholders' addresses, including ZIP Codes, for 
account billing, marketing, and other purposes. Accordingly, FIO will 
use ZIP Codes to define the geographic areas for calculating the 
Affordability Index because ZIP Code premium data is available and has 
(1) greater capacity to show variance across populations and geographic 
regions than counties and states; and (2) lower margins of errors than 
demographic data based on census tract. Incorporating these attributes 
of ZIP Codes has a positive impact on FIO's Affordability Index by 
providing a more detailed view of Affected Persons' automobile 
insurance experience than using state and county level data, and a more 
precise view than using census tract level data. This approach is 
consistent with prior reports studying the affordability of U.S. 
automobile insurance which analyzed ZIP Code-driven geographic 
areas.\95\ Focusing analysis on a ZIP Code basis allows areas with high 
concentrations of Affected Persons to be specifically evaluated, 
thereby facilitating understanding of the insurance experiences of 
Affected Persons across the United States and compensating for the lack 
of individualized data about Affected Persons.
---------------------------------------------------------------------------

    \94\ FIO considered but decided not to use census tract data for 
the Affordability Index because insurers do not sort data by census 
tract, but instead by ZIP Codes.
    \95\ See Tom Feltner and Douglas Heller, ``High Price of 
Mandatory Auto Insurance in Predominantly African American 
Communities'' (Consumer Federation of America November 2015), 
available at http://consumerfed.org/wp-content/uploads/2015/11/151118_insuranceinpredominantlyafricanamericancommunities_CFA.pdf?source=externa; Stephen Brobeck and J. Robert Hunter,, ``Lower-income 
Households and the Auto Insurance Marketplace: Challenges and 
Opportunities'' (Consumer Federation of America, January 2012), 
available at http://consumerfed.org/reports/cfa-report-title-forthcoming/; NAIC, ``NAIC Insurance Availability and Affordability 
Task Force Final Report'' (January 1998), available at http://www.naic.org/documents/prod_serv_special_iaa_pb.pdf.
---------------------------------------------------------------------------

    In its July 2015 Notice, FIO proposed defining majority-minority 
geographic areas as those ZIP Codes in which the minority population 
exceeds 50 percent.\96\ Although FIO proposed that, for purposes of its 
working definition, it would define LMI individuals as those living in 
areas where the annual income of the geographic area is less than 80 
percent of the median household income of a metropolitan statistical 
area or state,\97\ it did not provide the parameters for establishing 
the geographic areas for LMIs. As explained above, using a ZIP Code as 
a unit of analysis allows FIO to match demographic data for Affected 
Persons to aggregated data already collected by insurers, including ZIP 
Code-level data regarding average premiums. Additionally, income data 
is readily available at the ZIP Code level. Both the CFA and NYRL 
commented that ZIP Codes should be considered in the identification of 
Affected Persons. The CFA commented that FIO should refine the proposed 
definition of ``LMI people'' to focus geographic areas ``explicitly on 
LMI `ZIP codes.' '' \98\ The NYRL commented that ``the focus should be 
placed on zip codes identified as populated by low- to moderate-income 
individuals and zip codes with predominantly non-white populations,'' 
resulting in more targeted areas for FIO to ``develop a more accurate 
evaluation of accessibility and affordability of personal auto 
insurance.'' \99\ Based on the views expressed by commenters and 
stakeholders, and FIO's own analysis, FIO will use majority-minority 
ZIP Codes and majority-LMI ZIP Codes as parameters to ensure that the 
Affordability Index more accurately captures the experiences of 
Affected Persons.
---------------------------------------------------------------------------

    \96\ July 2015 Notice, supra note 3, at 38,280.
    \97\ Id.
    \98\ CFA Comment, supra note 37, at 4.
    \99\ NYRL Comment, supra note 37, at 4.
---------------------------------------------------------------------------

    The use of ``majority-LMI ZIP Codes'' in the final working 
definition adds specificity to the proposed definition's use of 
``specified geographic area'' as the parameter for reflecting LMI 
persons in the calculations. For purposes of the final working 
definition, majority-minority ZIP Codes are those in which the minority 
population exceeds 50 percent, consistent with the proposed definition, 
and majority-LMI ZIP Codes are those in which LMI persons exceed 50 
percent of the population. FIO is mindful of the IRC's comment that 
this approach could still result in an overlap of the categories of 
Affected Persons within the same ZIP Code. Thus, a majority-minority 
ZIP Code may also be a majority-LMI ZIP Code. FIO will keep this 
potential complication in mind when identifying majority-minority and 
majority-LMI ZIP Codes.

B. Definition of Affordability and Application of the Affordability 
Index

    In developing its definition of affordability, FIO considered three 
definitions submitted by commenters in response to the April 2014 
Notice, and ultimately proposed adopting the definition of 
``affordability'' derived from a dictionary and submitted by one 
commenter: ``being within the financial means of most people.'' \100\ 
FIO explained that this ``common sense definition may be used to 
develop `a practical and effective approach to monitoring access to 
affordable personal automobile insurance,' '' and proposed that it will 
presume automobile liability insurance is affordable for Affected 
Persons if the affordability index is less than or equal to 2 percent 
of household income.\101\
---------------------------------------------------------------------------

    \100\ July 2015 Notice, supra note 3, at 38,279 & fn. 29 (citing 
PCI, at 1 (June 9, 2014), available at http://www.regulations.gov/#!documentDetail;D=TREAS-DO-2014-0001-0020).
    \101\ July 2015 Notice, supra note 3, at 38,280.
---------------------------------------------------------------------------

    The FSR commented that generally the proposed definition is ``an 
acceptable construct'' but ``strongly disagree[d] that it can be 
reconciled with the factors and criteria delineated under the proposed 
affordability index,'' and that ``it is impossible to address the

[[Page 45380]]

issue of affordability without openly referencing the concepts of 
consumer choice.'' \102\ The AIA commented that the ``proposed 
definition is vague and ambiguous, and does not consider variations 
among states in required liability limits, . . . mandated personal 
injury protection (PIP), or claim and litigation environments'' and 
``suggest[ed] that a reasonable definition . . . is one that recognizes 
relativity and consumer choice.'' \103\ NAMIC commented that although 
it understood ``the difficulty in attempting to create such a 
definition,'' it found the proposed definition of affordable confusing 
because of ``the juxtaposition of `most people' and `Affected Persons,' 
'' and that ``[i]t is not clear what `most people' means'' in the 
context of the definition.\104\
---------------------------------------------------------------------------

    \102\ FSR Comment, supra note 34, at 4.
    \103\ AIA Comment, supra note 51, at 2.
    \104\ NAMIC Comment, supra note 63, at 2.
---------------------------------------------------------------------------

    CFA commented that affordability ``must be precisely defined rather 
than defined loosely as `within the financial means of most people,' '' 
and ``that two percent of the household income of an Affected Person is 
the appropriate standard.'' \105\ Further, CFA stated that assessment 
of affordability should be relative to the purchasing capacity of low- 
and moderate-income persons, because ``it is essential that 
affordability is gauged against the ability of low-wealth drivers to 
purchase insurance.'' \106\
---------------------------------------------------------------------------

    \105\ CFA Comment, supra note 37, at 1.
    \106\ Id.
---------------------------------------------------------------------------

    As these varying comments from the insurance industry and consumer 
advocates illustrate, there is not one generally acceptable method or 
definition of affordability. Rather, there are differing views, 
approaches, and methodology. Accordingly, FIO has considered all the 
comments provided, and adopts an objective standard as its first formal 
measure and definition of affordability of automobile insurance for 
Affected Persons. For the reasons explained in the July 2015 Notice, 
and reiterated below, FIO presumes that personal automobile liability 
insurance is affordable if the Affordability Index is less than or 
equal to 2 percent in the areas used to account for Affected Persons. 
In explaining its proposal, FIO cited a study of the affordability of 
personal automobile insurance that found the national average insurance 
expenditures divided by national median income has been below two 
percent since 1995.\107\ FIO also cited a report that found, based on 
2013 data, that consumers spent about 1.6 percent of average income 
(after taxes) on auto insurance.\108\
---------------------------------------------------------------------------

    \107\ July 2015 Notice, supra note 3, at 38,280 (citing IRC, 
``Auto Insurance Affordability,'' (November 2013), at 7).
    \108\ Id. at 38,280. See also BLS, Current Employment 
Statistics, supra note 19.
---------------------------------------------------------------------------

    In comments to the July 2015 Notice, consumer advocates generally 
favored the 2 percent benchmark, while insurers and industry 
representatives opposed the adoption of a fixed numerical value as a 
measure for affordability. Both the CFA and NYRL stated that 2 percent 
is consistent with previous analysis of basic household budgets.\109\ 
On the other hand, insurers and others generally opposed adopting the 2 
percent metric. The AIA stated that the 2 percent is artificial.\110\ 
The AAA stated that the 2 percent is only a single measure, and using 
it alone may be ill-advised because it could over simplify the complex 
task of defining ``affordability.'' \111\ Allstate expressed concerns 
with the 2 percent, stating that FIO should monitor actual cost rather 
than make subjective assessments using a threshold.\112\ The FSR 
indicated that 2 percent is a misrepresentation of the term 
``affordable'' and is unjustifiably low; and that it could create a 
perception that automobile insurance coverage is an inexpensive service 
whose price can easily be altered to meet particular needs and 
situation of each particular consumer.\113\ The IRC said the 2 percent 
is arbitrary in that an external reference or standard does not exist 
to support it; \114\ while NAMIC stated that a reasonable basis for a 2 
percent standard does not exist, and that it raises the question of how 
much the expenditure may deviate from the specified percentage before 
automobile liability insurance is deemed ``unaffordable.'' \115\ The 
PIA said that relying on a metric to define affordability in terms of a 
percentage could lead to the desire to ``fix'' the problem by some kind 
of a subsidy; \116\ and the PCI said the 2 percent is weighted heavily 
towards the higher income groups because LMIs, by definition, will 
spend a higher percentage of their income on automobile insurance as 
would be the case for other necessities.\117\
---------------------------------------------------------------------------

    \109\ CFA Comment, supra note 37, at 3; NYRL Comment, supra note 
37, at 3.
    \110\ AIA Comment, supra note 51, at 3.
    \111\ AAA Comment, supra note 52, at 2.
    \112\ Allstate Comment, supra note 55, at 2.
    \113\ FSR Comment, supra note 34, at 5-6.
    \114\ IRC Comment, supra note 40, at 2.
    \115\ NAMIC Comment, supra note 63, at 3-4.
    \116\ PIA Comment, supra note 36, at 2.
    \117\ PCI Comment, supra note 35, at 2.
---------------------------------------------------------------------------

    FIO has carefully considered the views expressed by the commenters 
on this subject, including those who oppose using the 2 percent 
measure. Nevertheless, for purposes of monitoring the affordability of 
personal auto liability insurance, FIO will presume that insurance is 
affordable if the Affordability Index is less than or equal to the 2 
percent benchmark. Based on the final working definition, the 
Affordability Index is the average annual premium divided by median 
household income.\118\
---------------------------------------------------------------------------

    \118\ More specifically, as described above, the Affordability 
Index will be calculated using the average annual written premium 
for personal automobile liability insurance in the voluntary market, 
divided by median household income for areas which are majority-
minority or majority-LMI, i.e., Affected Persons exceed 50% of the 
population.
---------------------------------------------------------------------------

    In adopting this threshold, FIO considered that the overall cost of 
living varies considerably across the nation and that variation is 
reflected in part by the variation in household income. By basing the 
threshold on a specific percentage of household income, the measure 
will adjust, at least in part, for the variations in the overall cost 
of living and income levels from region to region. Using household 
income at the ZIP Code level is superior to other approaches because it 
(1) applies to more of the population than family income, (2) lessens 
the effect of outliers that could skew averages, (3) avoids the 
complexity of residual income approaches that could be biased due to 
high cost areas, and (4) is a widely accepted and used component to 
analyze affordability of other consumer products.\119\
---------------------------------------------------------------------------

    \119\ See, e.g., ``America's Rental Housing: Evolving Markets 
and Needs,'' (Joint Center for Housing Studies of Harvard University 
(2013), available at http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/jchs_americas_rental_housing_2013_1_0.pdf; 
and, New York City Rent Guidelines Board, ``2015 Income and 
Affordability Study'' (April 2015), available at http://www.nycrgb.org/downloads/research/pdf_reports/ia15.pdf (using 
household income in rental housing affordability study).
---------------------------------------------------------------------------

    In settling on the 2 percent benchmark, FIO was most persuaded by 
the data in the Consumer Expenditure Survey, as produced by the Census 
Bureau and the BLS, which showed that the average household spent 2 
percent of its income on automobile insurance.\120\ FIO notes that 
other key consumer goods and services already have an established 
affordability threshold that is expressed as a percentage of household 
income. For example, the affordability threshold for housing is 30 
percent, healthcare is 9.56

[[Page 45381]]

percent,\121\ and residential running water is 2 percent.\122\
---------------------------------------------------------------------------

    \120\ BLS Consumer Expenditure Survey, ``Table 1110. Deciles of 
income before taxes: Annual expenditure means, shares, standard 
errors, and coefficients of variation'' (2014), available at http://www.bls.gov/cex/2014/combined/decile.pdf.
    \121\ Shared Responsibility for Employers Regarding Health 
Coverage, 79 FR 8544 (Feb. 12, 2014), available at https://www.gpo.gov/fdsys/pkg/FR-2014-02-12/pdf/2014-03082.pdf; 26 CFR 
601.105, available at https://www.irs.gov/pub/irs-drop/rp-14-62.pdf.
    \122\ The cost of water/wastewater is considered unaffordable 
when it exceeds 2% of median household income. See U.S. 
Environmental Protection Agency, Memorandum re: Financial Capability 
Assessment Framework for Municipal Clean Water Act Requirements 
(Nov. 24, 2014), available at http://www.epa.gov/sites/production/files/2015-10/documents/municipal_fca_framework.pdf.
---------------------------------------------------------------------------

    Therefore, FIO adopts a 2 percent Affordability Index as a 
reasonable empirical benchmark for monitoring affordability and for the 
study to compare the cost of automobile insurance for Affected Persons. 
FIO acknowledges that the Affordability Index does not account for all 
circumstances which may be relevant to an individual consumer's cost of 
personal automobile insurance. Affordability for any individual 
consumer can be assessed accurately only within the context of that 
consumer's circumstances.

C. Data Sources

    In the July 2015 Notice, FIO specifically requested input on how to 
best obtain appropriate data to monitor effectively the affordability 
of personal automobile insurance for Affected Persons. After 
considering stakeholder comments and potential information services, 
FIO intends to collect and analyze data received and aggregated by 
statistical agents. In addition, FIO will use data publicly available 
through the Census Bureau.\123\ In response to FIO's request, consumer 
advocate commenters suggested that FIO issue a data call to the 100 
largest insurers in each state in order to obtain vehicle data and to 
reflect the premiums actually offered to Affected Persons.\124\
---------------------------------------------------------------------------

    \123\ See Census Bureau, ``American Fact Finder,'' available at 
http://factfinder.census.gov/.
    \124\ CFA Comment, supra note 37, at 6; NYRL Comment, supra note 
37, at 5-6.
---------------------------------------------------------------------------

    Contrary to comments from consumer advocates and the views 
expressed by Ranking Member Waters,\125\ industry stakeholder comments 
objected to FIO issuing any data calls or other mandatory collections. 
Many argued that FIO could obtain information it needed from existing 
sources. The AIA commented that FIO should consult with the Automobile 
Insurance Plan Service Office (AIPSO) for data,\126\ while the AAA 
commented that FIO should use data available from statistical agents 
such as the Independent Statistical Services (ISS), Insurance Services 
Office (ISO), and the National Institute of Statistical Sciences 
(NISS). Allstate commented that FIO should use data available from the 
NAIC, the Insurance Information Institute (III), and IRC.\127\ The FSR 
expressed concerns about the substance, workability, cost, and 
administrative burden of a data call.\128\ The IRC commented that FIO 
should conduct an analysis of existing data before initiating research 
requiring new and costly data reporting and collection efforts.\129\ 
NAMIC, IRC and FSR's comments averred that FIO should first analyze and 
report existing studies and other data already available.\130\ In 
addition, NAMIC's commented that the term ``monitor'' should not be 
interpreted as authority for FIO to collect data directly from 
insurers.\131\ Finally, PCI stated that FIO should use BLS and Census 
Bureau data, and if FIO were to issue a data call, then it should rely 
upon third parties--statistical agents like ISO, ISS, and NISS--to 
aggregate that data.\132\
---------------------------------------------------------------------------

    \125\ Waters' Letter, supra note 86.
    \126\ AIA Comment, supra note 51, at 5.
    \127\ Allstate Comment, supra note 52, at 2.
    \128\ FSR Comment, supra note 34, at 3.
    \129\ IRC Comment, supra note 40, at 3.
    \130\ NAMIC Comment, supra note 63, at 4-5; IRC Comment, supra 
note 40, at 3; and FSR Comment, supra note 34, at 3-4, 10-11.
    \131\ NAMIC Comment, supra note 63, at 5.
    \132\ See PCI Comment, supra note 35, at 5.
---------------------------------------------------------------------------

    FIO has reviewed and evaluated the comments received from 
stakeholders on whether to collect data directly from industry to 
support this work, and respects concerns about duplicative information 
gathering. FIO intends to avoid unnecessary burdens or expenses on 
stakeholders. FIO will exercise all reasonable efforts to use existing 
available information. Accordingly, at this time, FIO will not collect 
data directly from insurers through a data call as proposed in the July 
2015 Notice.
    For its initial affordability study, FIO will use data currently 
available from the Census Bureau,\133\ statistical agents, and certain 
states. In this regard, 20 states require insurers to report ZIP Code-
level automobile premium data to one of three statistical agents (ISO, 
ISS, and NISS) who collect and aggregate this data.
---------------------------------------------------------------------------

    \133\ See Census Bureau, ``American Fact Finder,'' available at 
http://factfinder.census.gov/.
---------------------------------------------------------------------------

    For purpose of its next study in 2017, FIO will request data from 
insurers who have a statutory surplus greater than $500 million as of 
December 31, 2015, and who annually collect more than $500 million of 
premium for personal automobile insurance.
    For 2017, FIO will request that large insurers who do not already 
report ZIP Code-level premium data voluntarily provide that data to the 
statistical agents with which the insurers typically work. FIO will ask 
that insurers covered by this request provide the statistical agents 
the following information: (i) ZIP Code-level premium data, (ii) for 
liability coverage at the financial responsibility limit, (iii) for the 
voluntary market.
    In combination, the data sources described above are expected to 
provide sufficient data to support the objective analysis necessary for 
FIO to monitor the affordability of personal auto insurance for 
Affected Persons. If, however, FIO receives incomplete data, or if 
insurers or statistical agents are not responsive to this request, FIO 
may collect information directly from those insurers in the future.
    Going forward, FIO will rely upon the methodology and the data 
described above to calculate the Affordability Index it will use to 
monitor the affordability of automobile insurance premiums in majority-
minority or majority-LMI ZIP Codes. FIO will publicly report its 
findings annually and note, among other things, the trend of the 
Affordability Index relative to each of the analyzed ZIP Codes.

Michael T. McRaith,
Director, Federal Insurance Office.
[FR Doc. 2016-16536 Filed 7-12-16; 8:45 am]
 BILLING CODE 4810-25-P

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