How to Get Cheaper Car Insurance: Be White

It’s part of the industry’s business model to charge different drivers different prices. But when does that become unfair?

Allen Fredrickson / Reuters

As something that tens of millions of American driver are required by law to pay for every month, auto insurance is one thing that most people believe should be priced fairly. It doesn’t offend notions of fairness for a bad driver to face steeper premiums, and it’s accepted practice in the industry to include customers’ age and gender in computing their rate. But what if insurance companies appear to be systematically charging entire racial or socioeconomic groups different amounts for the same product?

This has been a concern in the past: There’s evidence insurance companies use proxies for socioeconomic status such as occupation and educational background to set rates, rather than relying on indicators of driving safety, such as an accident-free record. The typical response from the insurance industry is that this data is highly useful as indicators of financial risk; if a customer is going to be less likely to pay his bill on time, the company would like to know.

A new report by the Consumer Federation of America found that insurance premiums also differ greatly by race. The report found that even among safe drivers, areas that are predominantly African American are charged significantly higher premiums for auto insurance. The CFA’s analysis looked at quotes from the five largest insurers—Allstate, Farmers, Geico, Progressive, and State Farm—by zip code, and found that premiums were on average 70 percent higher for residents of mostly black communities, versus mostly white ones.

So are insurance companies singling out black drivers to make them pay higher rates? Not necessarily: The black insurance premium could just be an unwitting and unfortunate consequence of using proxies for financial status. After all, income disparities are often blamed for why blacks and Hispanics are more than twice as likely to be rejected for mortgage loans.

But it is more complicated than that. Proxies that discriminate against entire racial groups seem unfair, and besides, are illegal. Moreover, the CFA, in its report, controlled for income and still found that substantial differences in price based on race alone. More specifically, black poverty can’t be used to explain away the problem. It was in mostly black upper-middle-class zip codes that drivers saw the highest insurance premium—on average, what they paid was nearly three times as much as a driver from a white-heavy town and with a similar income.

At this point, the CFA is more interested in solving the problem than pointing fingers. “We are not rushing to judgment about why this happens,” said Tom Feltner, the director of financial services at CFA, in a press release. But his colleague Robert Hunter, the director of insurance at CFA, was not as cautious: Speaking to Marketplace, Hunter said the pricing disparities “are hard to fathom actuarially and look a lot like unfair discrimination.”