Study Points to Rate Bias in U.S. Auto Insurance Industry

Finds that residents of Black and Hispanic communities pay more

Editors Note

According to James Lynch, chief actuary of the Insurance Information Institute, a not-for-profit organization funded by the insurance industry to provide unique, data-driven insights to inform and empower consumers:

"U.S. auto insurers do not know the race of their policyholders and, by law, are forbidden to ask prospective policyholders about their race when they apply for coverage. Moreover, U.S. auto insurers do not adjust their rates based on any proxy for race.

The price policyholders pay for auto insurance is based on many factors, including personal driving record, make/model of the vehicle, number of miles driven and the amount of coverage purchased.

Insurance is closely regulated by state regulators and lawmakers. U.S. auto insurers must submit to the states detailed filings to justify how much they charge policyholders. Private-passenger auto insurance rates must be approved, often in advance, after a thorough review that sometimes takes months or even years."

The impact of the U.S. auto insurance industry's use of potentially discriminatory rate setting practices were highlighted in a recent study by the website Insurify, pointing to higher rates charged to Black drivers with good records vs. white drivers with bad ones. 

Key Takeaways

  • The insurance comparison website Insurify has released its 2020 Insuring the American Driver report, examining trends in car insurance cost and coverage in the U.S.
  • The report found that cities and towns with majority Black residents pay the most, compared with areas of any other racial makeup.
  • Majority-Hispanic neighborhoods also pay more than majority-white neighborhoods.
  • Legislators and regulators say they are taking steps to address the business practices that discriminate against people of color.

Black and Hispanic Communities Pay More Than White Ones

While Insurify devotes just one page to race in its 45-page report on auto insurance trends in the U.S., it’s enough to show the magnitude of racist practices in the industry.

The study's findings include:

  • Black drivers with a clean record who live in majority-Black neighborhoods pay almost 20% more than white drivers who live in majority-white neighborhoods and have previous driving offenses on their records. 
  • Black drivers who are homeowners in majority-Black neighborhoods pay 13% more than white drivers who rent in white neighborhoods.
  • A Black driver with excellent credit living in a Black neighborhood pays 24% more than a white driver with poor credit who lives in a white neighborhood.
  • Hispanic drivers with a clean record living in majority-Hispanic neighborhoods are also charged more than white drivers who have negative marks on their driving records but live in majority-white neighborhoods. 

This isn’t the first time a report has exposed racial inequality in the auto insurance industry. In 2015, the Consumer Federation of America found that communities where more than three-quarters of the population is Black pay a staggering 70% more than drivers in communities where less than a quarter of residents are Black.

In response to that report, the Property Casualty Insurers Association of America declared insurance rates to be “color-blind and solely based on risk.”

In 2017, ProPublica published an investigative report showing more evidence of companies charging disproportionately higher rates to drivers in minority communities. 

Regulators and Legislators Respond

Auto insurance companies don’t directly consider race during the quote process. However, they use other socioeconomic factors that effectively discriminate against people of color.

For example, renting instead of owning a home can hurt your chances of qualifying for a lower premium.

In response to these practices, the National Association of Insurance Commissioners (NAIC) announced in July that it would create a committee to address the “unconscious bias” in insurance pricing. The committee is to focus on the following:

  • Research and analyze the level of diversity and inclusion in the industry.
  • Work with stakeholders on the issues of race, diversity, and inclusion.
  • Identify current practices that potentially disadvantage minority customers.
  • Make recommendations by year-end regarding steps to increase diversity and inclusion, address practices that discriminate against minorities, and ensure ongoing engagement in the issues by the NAIC. 

In September, Sen. Cory Booker of New Jersey introduced the Prohibit Auto Insurance Discrimination (PAID) Act in the U.S. Senate. A companion bill had been introduced in the House earlier by Rep. Bonnie Watson Coleman of New Jersey and Rep. Rashida Tlaib of Michigan. The bill aims to end the use of certain socioeconomic factors that could disproportionately hurt minorities, such as income, education level, credit score, homeownership status, and zip code, to determine auto insurance rates.

The Bottom Line

It’s unclear whether the PAID Act will gain any traction in Congress, or the NAIC committee will deliver practical steps to solve systemic racism in the auto insurance industry. But while the issues have been reported on in the past, there was little to no response from the industry or lawmakers, giving some hope to a solution this time around.