Behind the wheel, you do everything right: You obey the speed limit, come to a full halt at stop signs and haven’t had a fender bender in years. You’ve been a loyal customer and have even scored good-driver discounts. So why are your car insurance premiums hundreds of dollars more than a driver with an identical profile who lives a few blocks away?
It’s not you, it’s your ZIP code. And in the actuarial offices of insurance companies, ZIP code is a polite sounding proxy for “socio-economic factors,” otherwise known as race and ethnicity.
Living in a zip code with fewer white residents has the same impact on car insurance premiums as having a speeding ticket on your driving record.
Those factors are largely derived from demographic data and claims history averages of the population living in the driver’s same ZIP code. The result: A large disparity in auto insurance premiums for communities of color in many places across the country, according to in a new report from MoneyGeek.com.
The high cost of racially-influenced price setting
MoneyGeek compared demographics and auto insurance premiums in 1,648 ZIP codes in 69 cities across the U.S. Using a consistent driver profile for comparison, analysts measured the correlation between a driver’s proximity to white populations and the amount they pay in car insurance premiums.
Besides having nothing to do with your driving acumen and history, ZIP code data is a muddy comparison point.
It found that drivers living in predominantly white ZIP codes often pay significantly less for car insurance than people living in the same cities in ZIP codes with a lower proportion of white residents. And this isn’t a regional phenomenon.
Across the country, California, to St. Louis to Atlanta to Baltimore, In the 12 cities with the most extreme price variations, the discrepancy amounted to as much as $891 a year (in New Orleans).
In fact, living in a zip code with fewer white residents can have the same impact on your car insurance premiums as having a speeding ticket on your driving record.
It’s all about location, location, location
Auto insurers are not allowed to base rates on race and ethnicity. But they can use ZIP code data, which tells them the average number and severity of claims in an area.
Here’s the problem: With all else being equal (age, driving record, credit scores, marital status), the practice of using ZIP codes to influence premiums has led to Black and Latinx consumers paying more for the exact same financial products than white counterparts.
Besides having nothing to do with your driving acumen and history, ZIP code data is a muddy comparison point. For example, it’s not clear whether there are more incidents of vandalism and accidents in certain areas, or simply more claims filed.
Insurance companies have long been under fire for setting rates by using various proxies for socioeconomic status.
“Lower-income areas may have increased reporting of incidents to insurers because they do not have the ability to pay out of their own pockets for repairs. In higher-income areas, they have that ability, so residents may not report as often to insurance companies in order to avoid higher premiums down the road,” writes one of the study’s contributors, Kalinda Ukanwa, assistant professor of marketing at the University of Southern California.
This is not a new issue. Insurance companies have long been under fire for setting rates by using various proxies for socioeconomic status (such as occupation and education). In 2015 the Consumer Federation of America got rate quotes from five of the largest insurers based on ZIP codes. The results of that experiment were aptly captured by The Atlantic in the headline: “How to Get Cheaper Car Insurance: Be White.”
Car insurance premiums in communities of color
The exact algorithms insurance actuaries use to determine a driver’s premium are a secret as closely guarded as the recipe for Coca-Cola. But researchers have captured the impact on minority areas by getting premium quotes for a 40-year-old male driver with a 2010 Toyota Camry and full auto coverage with a $1,000 deductible.
MoneyGeek found that this driver would pay “up to $130 more for car insurance for every 10 percentage points less-white your ZIP code is.” The findings illustrate just how significant the ZIP code penalty is across the country:
- If this driver lived in a Baltimore ZIP code that is roughly 80% white, he’d pay $1,450 in annual premiums. In the neighborhood that is less than 10% white, premiums are around $2,150. The average annual insurance rate difference in Baltimore is $570.
- In Phoenix, the annual cost of coverage is $979 if you live in the predominantly white ZIP code of 85086. In the more diverse ZIP code of 85035, you’ll pay $1,320. The average ZIP code penalty in Phoenix is $344.
- In New Orleans ZIP codes where white people make up about 79% of residents, the driver would pay $2,000 a year in premiums. Compare that to the roughly $3,200 he’d pay in ZIP codes where the population is only 5% white. The average pricing variation between the higher and lower-paying ZIP codes in New Orleans is $891.
In many cases, living in a minority neighborhood has a larger impact on premiums than a speeding ticket or credit score drop, according to MoneyGeek.
For example, a driver who lives in a mostly white area of Phoenix and has a 16 to 20 mile-per-hour speeding violation will still pay 73% less in premiums than a driver with a spotless record living in a largely Black and Latino area. You’ll still pay 76% less in premiums if you live in a white ZIP code in Milwaukee, even if your credit score drops 55 to 60 points.
So much for the good driver discount and rate breaks for customer loyalty.
Speak up and call out discriminatory pricing
Insurance quotes are based on more than just geography. Age, gender, amount of coverage and your claims history also affect premiums. (Insurance is regulated on the state level, which means it is not subject to the same federal laws that prohibit discrimination by race, color, gender, age, national origin and marital status.) But in some states credit history, education level, marital status and occupation — data points that also lead to racially-based price setting — are also allowed to be used to set rates.
If you want to know what criteria your insurer used to set your rates, ask. Many states require insurers to provide detailed disclosures to customers who request the information. Ukanwa recommends asking what the rate would be if you lived in a different ZIP code. “This may open the way to renegotiating your rate.”
If you suspect you’re a victim of racially influenced car insurance rates, file a complaint or concern with your state insurance commissioner. The National Association of Insurance Commissioners (NAIC) provides a directory with contact information and links to each state’s website. You can also search past complaints levied against an insurer with the NAIC’s Consumer Information Source’s database.
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