Study finds discrepancies in car insurance

A new analysis of car insurance in four states found that drivers living in some minority neighborhoods were charged higher rates than similar drivers in mostly white areas, even when the average risk of a claim was similar.

The report, by the nonprofits ProPublica and Consumer Reports, covers rates in California, Illinois, Missouri and Texas, the states that made data available. The report examined quoted insurance premiums, as well as average claims paid by insurers — the first use of payout data to examine racial disparities in car insurance premiums, the researchers said. The analysis found that pricing disparities between neighborhoods that were mostly white and those inhabited mostly by minorities were wider than differences in risk could explain.

In some cases, the report said, major insurers charged premiums that were on average 30 percent higher in minority ZIP codes than in comparable nonminority neighborhoods. “This overpricing,” the report said, “may amount to a subtler form of redlining,” a term that refers to denial of services to minority areas.

The report, published Wednesday by Consumer Reports, said it was not entirely clear why insurers charged more in minority areas. It could represent a “vestige” of the days when racial discrimination by businesses was routine, researchers said, or it might be that proprietary algorithms used by individual insurers “inadvertently” penalized minority areas.

However, “It raises the question of whether those rates are justified,” said Julia Angwin, a senior reporter at ProPublica and one of the report’s authors.

The study looked at premium quotes for liability insurance, which covers bodily injury and property damage and is required in nearly all states. It also examined several years of data on average claims paid out in every ZIP code in the four states. ProPublica said it submitted public records requests to all 50 states and the District of Columbia, and just those four said they collected such data.

The insurance industry and some state regulators criticized the report, saying it oversimplified the way companies set rates. Insurance companies “do not discriminate on the basis of race,” James Lynch, chief actuary of the Insurance Information Institute, a trade group, told the researchers.

In a call with reporters on Wednesday, Lynch said the institute had commissioned its own actuarial analysis of ProPublica’s data and determined that the conclusions drawn from the study were “flawed.” The institute did not make its analysis available because it is in draft form, he said, but expects to make it available when the report is completed.

“This is a very, very serious charge being made on a very weak study,” he said. Asked if the discrepancies could result from an unintended consequence of the formulas used to set rates, Lynch said, “There is no unfair discrimination, intentional or unintentional.”

Because individual insurers do not release their losses on a ZIP code level, the analysis is based on aggregated losses by insurers. The California Department of Insurance dismissed that approach as “flawed,” the report said, saying an individual insurer’s losses in a given area may vary significantly from the industry average.

ProPublica said that while a given company’s losses could deviate from average losses experienced by insurers, it is “unlikely” that the differences would result in a consistent pattern of higher prices for minority neighborhoods.

The report resonated with consumer advocates. “I’m not surprised” by the findings, said Robert Hunter, director of insurance at the Consumer Federation of America. The federation has conducted a series of studies raising questions about the fairness of using nondriving criteria, like education and occupation, in setting auto insurance rates. In 2015, the federation published a study finding that rates are much higher in minority ZIP codes.

The federation’s studies did not include insurer payout data, which is a “good addition” to the analysis, Hunter said.

Fairness in setting auto insurance rates is crucial, he said, because liability coverage is usually mandatory and because people rely on their cars to get to work. Since insurance is regulated primarily by states, he urged consumers to contact their state insurance regulators to ask them to examine the fairness of rate-setting practices. Contacts by state are available at the National Association of Insurance Commissioners website.

There are ways drivers can get lower rates, such as by aggressively comparison shopping, experts say. Consumer Reports suggests using TheZebra.com, an online tool that offers estimates from a dozen or more insurers, depending on the state. Drivers should compare rates often, said Tobie Stanger, a senior editor at the magazine, because the supposed benefit of getting a discount by remaining with the same insurer for a long time is “mostly a myth.”

Typically, one or two insurers will offer lower rates in a given state. The magazine’s website offers a list of which insurers to check first, by state.

Another strategy is to get a lower premium by raising the policy’s deductible. Just be aware that if you have a claim, you will be responsible for more of the cost of any repairs.