“There is nothing inherent about poverty that makes people more or less risky drivers,” says Douglas Heller, an insurance expert with the Consumer Federation of America. And yet for decades, poor Americans have paid higher car insurance premiums than their wealthier neighbors — not because of their driving records, but because of their credit scores, job titles and education levels.
Last fall, Heller conducted a study that compared auto insurance prices between two Baltimore ZIP codes. On average, residents of the low-income neighborhood paid $1,000 more for their car insurance every year than the high-income neighborhood.
Shockingly, a similar 2018 CFA study found auto insurance could cost nearly $9,000 in the Detroit ZIP code 48224, where the median household income was $33,878. Michigan has since changed the minimum coverage requirements that resulted in such high premiums, but most states haven’t.
Credit-based insurance rates can result in proxy discrimination
Many insurers collect credit score, job title, and education-level data, factors that have nothing to do with a consumer’s driving ability. Insurers argue that these factors can predict a consumer’s likelihood of making a claim. The authors of 2007 study from the Federal Trade Commission claimed that credit data are “effective predictors of risk under automobile policies,” but in a dissenting statement released with the report, Commissioner Pamela Jones Harbour challenged the methodology and data used in the study and stressed that it fell short when exploring other possible pricing strategies.
“Even using the ‘best’ data the industry had to offer, the study still found that credit-based insurance scores have a small effect as a ‘proxy’ for membership in racial and ethnic groups,” Commissioner Harbor wrote. “The study should include a more thorough and balanced discussion of alternative predictors of risk, and their relative costs and benefits.”
What I find so repugnant about much of the insurance market’s pricing today is you have low-income safe drivers subsidizing the premium of wealthier drivers.
According to Heller, these socio-economic factors “tell an insurance company not whether the person is going to cause an accident, but whether the person might buy more insurance products.” That’s why, as InvestigateTV discovered in February, a waitress with a high school diploma and a clean driving record was repeatedly quoted a more expensive premium than a doctor with a college degree and DUI conviction, keeping all other factors the same.
“What I find so repugnant about much of the insurance market’s pricing today is you have low-income safe drivers subsidizing the premium of wealthier drivers,” Heller says.
To be clear, proxy discrimination doesn’t have to be intentional. Even systems specifically designed to eliminate bias can accidentally discriminate against race, income and other demographic factors.
We need more consumer protections from state regulators
The Constitution leaves the regulation of insurance to the states — depending on where you live, you have different protections when it comes to how your insurance rates are determined. It also means that the most effective way to create lasting change is to call your state’s insurance department. California, Hawaii and Massachusetts have all passed legislation prohibiting the use of credit in auto insurance pricing. Your state could be next.
Auto insurance rates should be based on driving factors.
Insurers aren’t necessarily using your annual income to price your insurance, but there is evidence they leverage factors Heller refers to as “close surrogates” for income, like credit score and job title. In California, requiring insurers to prove they base rates primarily on driving record was a component that contributed to far lower premium increases than the nationwide average.
In light of projections of a major decrease in auto insurance claims following stay-at-home orders during the COVID-19 pandemic, Heller says, “it’s a good reminder that we should be challenging practices that don’t have to do with driving, because we saw what happens when you stop driving: you don’t have accidents.”
We need more support systems for low-income drivers
The California Low-Cost Auto Insurance program is an example of how a state government can provide affordable insurance that satisfies the state requirement for coverage. Importantly, this program is a resource for licensed drivers, with a good driving record and meet eligibility requirements. This is a measure that can be replicated in other states to help address issues of affordability in auto insurance.
Meanwhile, H.R. 1756, a House bill introduced by Michigan representative Rashida Tlaib, aims to leverage the Fair Credit Reporting Act to prevent insurers from using a consumer’s credit score when determining auto insurance rates. While this would be a great win for consumers nationwide, even if this does not succeed in passing the House, Heller says that it is still an important way to elevate the conversation around inequality in auto insurance pricing.
The best advice no one can give
Insurance isn’t optional for Americans who need to drive. In almost every state, drivers are legally required to buy car insurance without adequate consumer protections. For the people who need it most — the people where $100 can make or break the budget — even the best financial advice won’t help them overcome deeply-rooted inequalities.
Until regulatory changes protect more low-income consumers, the best advice for saving on car insurance is to live in an affluent neighborhood, maintain an excellent credit score, own a home, and get a master’s degree.
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