ProPublica has a major investigative analysis where they conclude that Minority Neighborhoods Pay Higher Car Insurance Premiums Than White Areas With the Same Risk
The analysis is quite thorough, though they are working with industry wide data since insurance companies won’t release their own loss rates broken down by neighborhood. The report is quite damning. Insurance companies are bound by various state regulations that prohibit discrimination and require pricing to reflect risk.
OTIS NASH WORKS SIX DAYS A WEEK AT TWO JOBS, as a security guard and a pest control technician, but still struggles to make the $190.69 monthly Geico car insurance payment for his 2012 Honda Civic LX.
“I’m on the edge of homelessness,” said Nash, a 26-year-old Chicagoan who supports his wife and 7-year-old daughter. But “without a car, I can’t get to work, and then I can’t pay my rent.”
Across town, Ryan Hedges has a similar insurance policy with Geico. Both drivers receive a good driver discount from the company.
Yet Hedges, who is a 34-year-old advertising executive, pays only $54.67 a month to insure his 2015 Audi Q5 Quattro sports utility vehicle. Nash pays almost four times as much as Hedges even though his run-down neighborhood, East Garfield Park, with its vacant lots and high crime rate, is actually safer from an auto insurance perspective than Hedges’ fancier Lake View neighborhood near Wrigley Field.
Most insurance companies refused to respond to their requests. Some have responded with “we don’t discriminate based on race” boilerplate that does not address the specific issues around rating setting algorithms that the article raises. Some of the state insurance regulators and insurers pushed back on ProPublica’s methodology claiming ProPublica’s dataset is incomplete and doesn’t accurately reflect loss rates. Of course, insurers also refuse to release more complete data, or make it available for analysis, so there is no way to validate their claims.
They could release the data to independent researchers to exonerate themselves, but haven’t offered to do so as yet. The industry has a long history of covering up redlining practices. My own take is that Pro Publica’s methodology is reasonable, and they’ve identified a very strong pattern that requires further investigation.
ACTION: So what should you do if your concerned about this? There are three actions you can take.
- Call your insurance company, ask to speak with a supervisor and ask to provide ProPublica with a specific response to this article that provides details on their pricing algorithm. Tell them you will not be satisfied with boiler-plate, non-quantitative legalese that states “we don’t discriminate”.
- Call the state insurance commissioner. If you live in one of the states ProPublica investigated, their websites/numbers are below. All of them have consumer feedback hotlines and e-mails:
- Write to your representative in Congress and ask that they investigate this, especially if they are on the Housing and Insurance committee.
And please go read the entire article which also covers the history of redlining in the insurance industry, and the extensive efforts insurance companies and banks went through to cover up redlining and withhold data from investigators. ProPublica interviewed black insurance agents who related older practices that included denying coverage entirely in minority neighborhoods (redlining), to dissuading agents from working in black neighborhoods. They also descrieb the various excuses insurers have used to mask redlining practices. Thurgood Marshall was denied car insurance by Travellers because they said he lived in a “congested” area (Harlem). What are they odds they issued insurance at competitive rates on the Upper East Side, which is as “congested”? The NAACP and others advocated for the passage of anti-discrimination laws through the 40s and 50s:
most states passed laws stating “rates should not be inadequate, excessive or unfairly discriminatory.” The legislation defines discrimination as “price differentials” that “fail to reflect equitably the differences in expected losses and expenses.”
Of course, the laws didn’t immediately stop discrimination. In a thorough examination of MetLife’s history released in 2002, New York state insurance regulators catalogued all of the ways that the company discriminated against black applicants for life insurance — dating back to the 1880s when it refused to insure them at all, to the first half of the 20th century when it required minorities to submit to additional medical exams and sold them substandard plans.
In the 1960s, as insurers stopped asking applicants to declare their race, MetLife began dividing cities into areas. In minority areas, applicants were subject to more stringent criteria, according to the report. In 2002, MetLife agreed to pay as much as $160 million to compensate minorities who were sold substandard policies.
One plausible explanation for higher prices is “price optimization” algorithms which seek to maximize profits by predicting which consumers are less apt to shop around and quote them higher rates.