By Aubrey Cohen
Companies charge far more for car insurance in neighborhoods that are predominantly African-American than they do in other areas, a consumer group reported last week.
The Consumer Federation of America found that the average rate for basic car insurance coverage in ZIP codes where more than three-quarters of residents are African-American was 70 percent higher than in areas that are less than one-quarter African-American.
Officials from the group did not accuse companies of intentional discrimination or give potential reasons for the differences. They did call on state and federal regulators to investigate further and enact new regulations.
"Our research shows that it's well past time for insurance regulators to more seriously address the impact of auto insurance pricing methods on people of color as well as low-income drivers," J. Robert Hunter, the federation's director of insurance and the former Texas insurance commissioner, said at a news conference.
Industry groups countered that companies cannot and do not base rates on race and that any differences stem from the risk that drivers pose.
Companies charge more in minority ZIP codes
The Consumer Federation checked rates in most ZIP codes in America, it said, using the same driver profile in each area: a 30-year-old single female high school graduate who rents her home and has a clean driving record, a fair credit rating and a clerical job, and drives a 2000 Honda Civic 10,000 miles a year. It got rates for basic, state-minimum car insurance coverage from the five largest car insurers: Allstate, Farmers, Geico, Progressive and State Farm.
On average, the annual premium was $1,060 a year in areas that were predominantly African-American versus $622 in areas that were less than one-quarter African-American.
In a statement responding to the Consumer Federation's report, Robert Passmore, assistant vice president of the Property Casualty Insurers Association of America, said this could be due in part to where people live, writing: "Urban and other high-cost areas may face higher insurance rates because there is greater traffic congestion, more accidents and injury claims reported, higher medical expenses and repair costs, fraud, and more expensive legal representation and related fees."
The Consumer Federation found differences persisted even when comparing predominantly African-American and predominantly white ZIP codes with similar population densities, although they were smaller than the overall gap.
The federation also found the gap existed at every income level, although it wasn't uniform. The difference was only 4 percent in low-income areas (median income under $20,585). The gap ballooned in areas with household income of $63,001 to $101,685, with residents of these affluent, predominantly African-American ZIP codes paying nearly three times as much as their counterparts in mostly white places.
Progressive and Farmers both quoted rates that averaged 92 percent higher in predominantly African-American ZIP codes, while State Farm, Allstate and Geico charged 62 percent, 56 percent and 52 percent more, respectively.
Explaining the differences
The Consumer Federation did not offer potential reasons for the disparities but has previously asserted that insurance companies treat lower-income drivers unfairly by basing rates increasingly on factors like education, occupation and credit score, rather than driving history and mileage.
Norma Garcia, a senior attorney with Consumers Union, voiced this view at Wednesday's news conference.
"Some good drivers are being charged too much for all the wrong reasons," she said. "We think car insurance needs to be fixed so how one drives matters most."
Steven Weisbart, senior vice president and chief economist for the Insurance Information Institute (III), an industry group, said race is not responsible for any difference in rates, as insurers are not allowed to use race as a factor and don't even know the race of policyholders.
The Consumer Federation did not claim that insurers charge more because of race. Rather, the study shows that rates are higher in areas that are predominantly African-American.
"If that's the case, it's because the people that drive cars and live and operate in that area submit more claims," Weisbart said. "It's not because they're African-American."
Passmore, of the Property Casualty Insurers Association, also said in his statement that the number and cost of claims was behind any differences in rates between places.
Consumer group recommends changes
The report laid out a list of recommendations, including requiring car insurance rates to prioritize driver safety records over factors such as ZIP codes, education, occupation, and credit score. It also called for more reporting by insurance companies, including disclosure of rates charged to drivers with socioeconomic characteristics typical of low- and moderate-income people, since insurers don't collect income data directly.
Weisbart, of the III, asserted that any requirements to lower rates in certain areas would go against risk-based pricing, since all factors that insurers use relate to risk.
Aubrey Cohen is a staff writer at NerdWallet, a personal finance website. Email: acohen@nerdwallet.com. Twitter: @aubreycohen.