Report: Auto insurers charge higher premiums in minority neighborhoods

April 6, 2017

A new report suggests that auto insurers are charging car owners in minority neighborhoods higher premiums than folks in predominantly white neighborhoods. 

Sadly, that might not sound like big news. After all, insurers often set rates based on a vehicle owner's ZIP code, and it's not uncommon for minority neighborhoods to lag behind predominantly white neighborhoods in terms of income. Nor is it uncommon for poorer neighborhoods to see more reports of crime than wealthier ones.

Add those facts together, and some say it's no wonder that people living in minority neighborhoods end up with higher auto insurance premiums. It's an unfortunate fact of geography and the income gap.

But this report controls for those factors. And it found that when comparing ZIP codes with similar crime rates, neighborhoods with a greater population of minority residents still get stuck with bigger auto insurance bills.

The long, detailed report comes from the nonprofit Pro Publica, working in partnership with Consumer Reports. Analysts focused on data from California, Illinois, Missouri, and Texas, comparing various risk data with insurance premiums. The report's big takeaway?

"We found that some insurers were charging statistically significantly higher premiums in predominantly minority zip codes, on average, than in similarly risky non-minority zip codes. The difference in premiums was especially stark in Illinois, where nearly every insurer showed a disparity at every risk level. In California, Texas and Missouri, we found disparities in the riskiest zip codes."

Why did Illinois stand out? The reports notes that the insurance industry in Illinois is among the least heavily regulated in the U.S. However, even in California--which requires insurers to weigh a car owner's driving record more heavily than her ZIP code when setting premiums--there were substantial discrepancies. 

The report examined rates from a wide range of insurers, including popular companies like Allstate, Farmers, Geico, Liberty Mutual, Nationwide, State Farm, Travelers, and USAA. None were immune to the problem. (Mathletes, feel free to take a deeper dive.) 

Our take

Is the study perfect? Not remotely--there's no way that it could be, because insurers don't typically share information about claims per ZIP code, nor do they track the race of their clients.

Also, as the California Department of Insurance notes, it's entirely possible that insurers in the same ZIP code could experience different claim rates, which might explain why some insurers are charging more than others in the same area. And never mind the fact that neighborhoods don't always fall along ZIP code lines. 

However, Pro Publica notes that such counterarguments aren't especially persuasive:

"To be sure, it’s possible that some insurers have proprietary data that justifies the higher premiums we found in minority neighborhoods. Moreover, in any given zip code, an individual insurer’s losses could differ from the average losses experienced by insurers. But it is unlikely that those differences would result in a consistent pattern of higher prices for minority neighborhoods."

Whether the discrepancies cross over into the practice of redlining--that is, subtly but intentionally charging minorities more for services or denying them altogether using alternate, legal means of discrimination--is something that we can't answer. However, Pro Publica and Consumer Reports have provided a great deal of evidence to suggest that this topic deserves much further study down the road.

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