Car insurance rates seem fairly simple: If you are a bad driver, or you drive in heavy traffic, you will probably pay more due to the increased likelihood of an accident. We understand that.
But check this: In Louisville, you can pay substantially more based only on where you live, no matter what your driving record is. And even worse, it’s based on ZIP code – which means your neighbor across the street could pay much less, even if everything else is the same.
And here’s the real kicker – it’s much worse in communities that are majority African-American. How much worse? Louisville is in the top seven cities in the country for rate disparity correlated to race.
According to a number of studies by the Consumer Federation of America, rates for state-mandated car insurance are affected by more than just the driving record and driving habits of the insured. Previous studies have shown that education, income level, and credit score all have an effect on the rate you will pay for your car insurance.
Their latest study looked at the effect of racial makeup of your community on the cost of your car insurance. Their finding? “… on average, a good driver in a predominantly African American community will pay considerably more for state-mandated auto insurance coverage than a similarly situated driver in a predominantly white community.”
I’m sure, by this point, some people are eager to point out that some of those areas probably have higher traffic density, or some of those other factors like education and income. The CFA is ahead of you: they controlled for all those factors in their analysis.
And, if you are thinking this is a fluke caused by a small sample size, check this: “In total, the dataset used for this analysis includes 293,010 quotes from 64 affiliates of Allstate, Farmers, GEICO, Progressive and State Farm in 29,664 ZIP codes representing 99.4 percent of the US population.” (If you want to read the entire report, here it is in PDF form.)
So, how bad is it?
- In communities where more than three quarters of the residents are African American, premiums average 70 percent higher than in those with populations that are less than one quarter African American ($1,060 vs. $622).
- In the densest urban communities, the average premium in predominantly African American ZIP codes is 60 percent higher than the average premium in equally dense predominantly white urban ZIP codes ($1,797 vs. $1,126).
- The average premium in upper middle-income, predominantly African American ZIP codes is 194 percent higher than the average premium charged to a similarly situated driver in an upper middle-income, predominantly white ZIP code ($2,113 vs. $717).
- In several metropolitan regions around the country, including the Baltimore, New York, Louisville, Washington DC, Detroit, Boston, and Orlando metropolitan regions, the disparity of premiums is more than 50 percent between predominantly African American and predominantly white ZIP codes.
That’s pretty striking – 70% higher for the same policy for the same driver? Yikes! But, of course, that’s the national averages. How bad is it here in The Ville? Well, right from the report, here are the rates for the same policy for the same driver:
Live in a Louisville community that is <25% African-American — $804
Live in a Louisville community that is >75% African-American — $1,406
I’d say that the data speaks for itself.
So, what should we do?
Recommendations From the Study
First, let’s get the “are you accusing the insurance companies of being intentionally racist?” question out of the way. This quote from the study itself says it pretty well:
This analysis does not imply that auto insurance companies deploy explicitly discriminatory practices, and CFA did not conduct any research aimed at making such a determination. This analysis assesses impacts not intent, and our findings provide substantial evidence that the pricing of auto insurance results in good drivers in predominantly African American communities paying higher prices than similarly situated drivers in predominantly white communities – prices that for most lower-income drivers would be prohibitively expensive.
So, not trying to discern intent to discriminate, but noting that the end result has some of the same impacts, and so needs to be addressed. How to do that? A summary of recommendations from CFA:
“1. Regulators need to more seriously address the impact of auto insurance pricing methods on people of color and lower-income drivers.
- State insurance regulators should require all companies to provide a ZIP code pricing report in which they provide the premium for a good driver (using a standardized profile such as the one described in Figure 1 above) in every ZIP code in the state. These data should also include demographic data for each ZIP code to determine if the company’s pricing practices result in consistently higher premiums in communities of color. State insurance regulators should require companies that identify a pattern of higher insurance premiums in communities of color to provide further explanation of their pricing methodologies and plans to address the findings.
- The Federal Insurance Office (FIO) should review the affordability and accessibility of state-mandated minimum liability coverage in low- and moderate-income communities and communities of color. This review should be based on premium data collected directly from insurers for a series of driver profiles that are reflective of typical lower-income drivers and include premiums from both the standard and non-standard markets.
- The National Association of Insurance Commissioners should develop a model data call that will assist state regulators and legislators in tracking insurance costs for low- and moderate-income (LMI) drivers and those in traditionally underserved communities, including communities of color.
2. State lawmakers should enact legislation to improve data collection and enact needed reforms.
- Lawmakers should enact legislation requiring the collection of data related to pricing of auto insurance in communities of color, especially where state insurance regulators fail to do so.
- States should enact legislation that emphasizes drivers’ safety records over factors such as ZIP code and other non-driving related characteristics such as education, occupation, and credit score. The legislation should limit the rating factors insurers can use in setting auto insurance rates, including limiting the impact that a driver’s ZIP code can have on his or her rates relative to driving safety record.
- States should consider establishing programs that provide minimal liability coverage to safe lower-income drivers at an affordable price sufficient to fund claims covered by the program without subsidy. For several years, for example, California has offered this type of coverage to good lower income drivers for between $213 and $363 a year—a quarter to a third of the average premium currently charged in an LMI ZIP code.
- States should require insurers to offer drivers with clean driving records the lowest premium for which they qualify from among the company’s affiliates doing business in the state. The data set acquired by CFA shows the wide range of premiums charged to the very same driver by the five largest insurers, including affiliated underwriters within a single company’s group. Any driver with a good driving record should be offered the opportunity to purchase coverage from the affiliate that yields the lowest premium for that coverage. Currently, only California has this “best price” requirement for good drivers.”
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There you have it – an obvious inequity in our system, that should be addressed. There is simply no justification for two drivers with identical driving records and driving habits, but who happen to live around the corner from one another, to pay vastly different insurance rates. Let’s fix this now.
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What’s your experience? Have you noticed your insurance rates change when you moved? Tell us in the comments!
Featured image by Cheap Full Coverage Auto Insurance 
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