Something as simple as a driver’s ZIP code could impact how much major insurers decide to charge customers for their auto insurance, a new report revealed.
A first-of-its-kind analysis by investigative journalism organization ProPublica and Consumer Reports, published Wednesday, April 5, uncovered stark disparities in auto insurance rates in Black and Latino communities, and largely white communities. After examining car insurance premiums and payouts in California, Illinois, Missouri and Texas, researchers alleged that big-name insurers like Allstate, Geico and Liberty Mutual have been charging drivers living in nonwhite communities nearly 30 percent more for car insurance than drivers living in majority-white communities with similar accident risks.
Consumer advocates likened the “discriminatory rate-setting” to a subtler form of redlining, as insurance companies have traditionally denied services to residents of nonwhite areas. Blacks and Latinos already lag behind whites when it comes to earnings, so forcing them to pay higher rates for car insurance hits their pockets much harder.
Rachel Goodman, a staff attorney in the American Civil Liberties Union’s racial justice program, said the study’s findings were all too familiar.
“We already know that ZIP code matters far too much in our segregated society,” Goodman said. “It’s dispiriting to see that, in addition to limiting economic opportunity, living in the wrong ZIP code can mean that you pay more for car insurance regardless of whether you and your neighbors are safe drivers.”
A variety of factors go into determining pricing for auto insurance, such as the driver’s record of accidents or traffic violations, if he or she lives in a high-crime area, their age, gender and even the type of car they drive, according to Market Watch. A consumer’s credit history also has the power to drive their insurance rate up or down.
By law, however, insurance companies aren’t allowed to question a person’s race when determining their pricing, according to James Lynch, chief actuary of the Insurance Information Institute. Lynch called ProPublica’s report on discriminatory car insurance rates “inaccurate,” “unfair” and “irresponsible.”
“Insurance companies do not collect any information regarding the race or ethnicity of the people they sell policies to,” he explained, adding that rates are based on multiple risk factors like the susceptibility for more accidents or the fact that residents in certain areas tend to drive fewer miles.
“[Insurers] do not discriminate on the basis of race,” he added.
Justin Herdon, a media relations manager for Allstate Insurance echoed Lynch’s sentiments, saying “Allstate uses the likelihood of loss to price insurance, which is required by law and specific prices are approved by state regulators.” He also referenced a critique of Propublica’s report and methodology published by the by Institute, which utilized an outside actuarial firm to analyze its data.
So, what’s behind the stark disparities in insurance rates between nonwhite neighborhoods and predominately white neighborhoods? Researchers suggested that insurance companies’ tendency to treat minority communities differently may, in part, be a “vestige” of long-held practices where American companies routinely discriminated against nonwhite customers. They also noted the possibility that proprietary algorithms insurers use to determine pricing may inadvertently favor white areas over nonwhite ones.
“This investigation marks the first use of industry payout data to measure racial disparities in car insurance premiums across states,” the report read. “It’s part of ProPublica’s examination of the hidden power of algorithms in our lives — from the equations that determine Amazon’s top sellers to the calculations used to predict an individual’s likelihood of committing future crimes.”
For the analysis, researchers pored over more than 100,000 premiums charged for liability insurance, which included a combination of bodily injury and property damage represented in the minimum coverage drivers purchased in California, Illinois, Missouri and Texas. In all four states, the study found insurance companies with significant gaps in the rates they charged drivers in white areas compared to what they charged drivers in nonwhite areas. Of the 34 companies examined in Illinois, 33 of them were charging at least 10 percent more for the same safe driver in a minority neighborhood than they were for a driver in a white neighborhood with similar risks.
This trend continued in California, Missouri and Texas, where half of the insurers studied were found charging higher premiums for a safe driver in a high-risk nonwhite community than in similarly risky white communities.
The ProPublica/Consumer Reports analysis isn’t the first to come across similar findings when it comes to car insurance rate setting. A 2007 study out of the University of California, Los Angeles concluded that “redlining factors” were associated with variations in insurance costs. Moreover, a 2015 analysis by consumer advocacy group Consumer Federation of America found that communities where residents are more than three-quarters African-American are charged premiums 70 percent higher on average than communities with less than a quarter African-American population.
“If this were the only study ever done, I’d say it doesn’t prove much,” said Robert Hunter, the director of insurance at CFA. “But, it’s another study in a long string of studies, so that gives it more weight.”
A media relations director from Liberty Mutual Insurance has since issued a statement in response to the accusatory findings laid out in the ProPublica/Consumer Reports analysis.
“One of Liberty Mutual’s fundamental principles is to treat all people – including customers, co-workers and the public at large – with dignity and respect,” said Glenn Greenberg, Director of Media Relations & Sponsorships. “We support and embrace an inclusive environment that is free from discrimination in the workplace and in our businesses.”
Representatives from Geico didn’t respond to requests for comment.