Car Insurance Rates to Be Studied for Racial Bias
Consumer Reports has no financial relationship with advertisers on this site.
For decades, insurance companies have been accused of charging minority drivers more for car insurance. Now, state regulators plan to reexamine how insurers set rates, including the use of credit scores, education, and occupation to determine premiums.
The National Association of Insurance Commissioners, which sets guidelines for state insurance regulators, recently announced that it would analyze industry rate-setting practices to determine whether they have a negative impact on minorities. The move is significant because insurers are regulated at the state level rather than by the federal government.
"Within the NAIC, we're seeing unprecedented discussions between our members and stakeholders on race and its role in the design and pricing of insurance products," said Ray Farmer, NAIC president and director of the South Carolina Department of Insurance in an emailed statement. "It is the duty of the insurance sector to address racial inequality while promoting diversity."
The move follows long-standing complaints that auto insurers have been found to charge higher premiums to minority drivers. As a 2017 investigation by Consumer Reports and ProPublica found, some major insurers were charging drivers in minority neighborhoods rates as much as 30 percent more than drivers in other areas with similar accident costs.
This analysis was limited to the four states—California, Illinois, Texas, and Missouri—that collected the information necessary to do these comparisons. The other states said they didn’t have the necessary data.
In 2018, as a result of our report, California regulators required two insurers, Nationwide and USAA, to adjust their car insurance rates. They said their review confirmed our finding that linked the pricing disparities to incorrect applications of a California law allowing insurers to cluster neighboring ZIP codes into a single rating territory.
The difficulty of obtaining data on insurance pricing highlights drawbacks of insurance regulation on a state-by-state basis. Moreover, many states allow car insurance premiums to be tied at least in part to credit scores, education, and occupation. For example, though a handful of states, including California and New York, ban the use of credit histories in setting auto insurance prices, most do not.
Auto insurers argue that use of this type of data has predictive value in determining which drivers are likely to incur costly claims.
"More consumers benefit from the use of credit-based insurance scores than not," said Sean Kevelighan, CEO of the Insurance Information Institute, a trade group, in an emailed statement. "Eliminating or placing constraints on this risk assessment factor would penalize these individuals and ban the competitive efficiency of the insurance marketplace."
But consumer advocates say that relying on these factors can be unfair and racially discriminatory. Many Blacks and other minorities tend to have low credit scores, and fewer graduate from college, which would tend to penalize them under insurers' formulas.
"The use of credit scores and other factors by insurers that have nothing to do with risk reinforces racial inequalities already present in our society," says Chuck Bell, programs director, advocacy for Consumer Reports. "As a result, Black and Latinx consumers end up paying more for insurance or get denied coverage altogether."
Adds Bell, "NAIC's decision to form this committee is a good first step, but the time for action is long overdue. Insurance companies must be required to end these discriminatory practices and restore fairness to how they set their rates so that all families can get the coverage they need."
The NAIC says it will make recommendations about these practices to its membership by year end.
More from Consumer Reports:
Top pick tires for 2016
Best used cars for $25,000 and less
7 best mattresses for couples
Consumer Reports is an independent, nonprofit organization that works side by side with consumers to create a fairer, safer, and healthier world. CR does not endorse products or services, and does not accept advertising. Copyright © 2020, Consumer Reports, Inc.
