By: Andres Hidalgo
In all but two states, drivers are required by law to buy car insurance, but the government doesn’t adequately regulate how it is priced.[1] Underwriting is meant to discriminate individuals based on risk. Generally, the riskier the individual, the more money he/she will pay in insurance premiums.[2] Normally, when underwriting, insurance companies weigh different pieces of an individual’s personal information to gain a sense of an individual’s risk appetite. Information normally solicited from individuals include age, gender, marital status, medical history, education, occupation, and home ZIP code.[3] Additionally, in the auto insurance industry, one of the pieces of personal information insurers collect to determine pricing is credit history.[4] Auto insurers argue that credit history is important to collect because insurers use it as a tool to estimate frequency of claims filed and number of accidents, arguing that credit history and frequency of claims/number of accidents have an inverse correlation with one another.[5]
However, a growing number of states including California, Hawaii, and Massachusetts,[6] have prohibited or sought to prohibit auto insurer’s reliance of credit-based pricing because it negatively affects people of color.[7] Consumer advocates argue that people of color tend to have lower credit scores,[8] and because nearly every auto insurer relies heavily on credit history to determine pricing, people of color end up disproportionately paying more for auto insurance.[9] Recently, companies such as Loop, and Root have been able to differentiate themselves in the marketplace by promising to provide car insurance priced solely based on driving behavior.[10]
According to some economists, consumer activists, state and U.S. lawmakers, and regulators such practices amount to an egregious example of systemic economic racism by perpetuating systemic biases.[11] Others argue that the recent use of complex algorithms, coupled with big data analytics, has dramatically increased the potential for algorithmic bias and discrimination through indirect means.[12]
In light of this concern, this year the National Association of Insurance Commissioners’ Special Committee on Race and Insurance passed a broad series of measures to study the underlying causes of racial discrimination within the insurance industry.[13] One of the measures called for commissioners to “continue research and analysis of insurance, legal, and regulatory approaches to address unfair discrimination, disparate treatment, proxy discrimination, and disparate impact” — including the reliance of auto insurers on formulas that include credit scores.[14] Another measure called for commissioners to develop “analytical and regulatory tools” that would help the industry scrub itself of the practice of setting higher rates, based, in part, on a person’s credit, where a person lives, what level of education a person has completed and what job a person holds — all factors that result in people of color paying higher premiums.[15]
In addition to these measures, the Special Committee on Race and Insurance was tasked by the National Association of Insurance Commissioners with making recommendations “for statutory or regulatory changes,” but was not provided with a definitive timetable for the proposed changes.[16] The lack of a timetable has upset many consumer advocates and activists.[17] Nationally, this issue has gained the attention of President Biden and members of both houses of Congress, but proposals have not been able to gain momentum.[18]
[1] Adam Edelman, Bad credit shouldn’t affect car insurance, experts say. States are listening, NBC NEWS (August 9, 2021, 4:30 AM), https://www.nbcnews.com/politics/politics-news/bad-credit-shouldn-t-affect-car-insurance-experts-say-states-n1276173.
[2] Daniel Thomas Mollenkamp, Discriminatory Underwriting Guidelines in the Insurance Industry, Investopedia (October 8, 2021), https://www.investopedia.com/insurance-underwriting-guidelines-discrimination-5203311.
[3] Bad credit shouldn’t affect car insurance, experts say. States are listening, supra note 1.
[4] Id.
[5] Id.
[6] Jason Metz, Insurance Regulators Pledge To Address Racism And Discrimination Within The Industry, FORBES (Accessed on November 19, 2021, 9:45 AM), https://www.forbes.com/sites/advisor/2020/07/23/insurance-regulators-pledge-to-address-racism-and-discrimination-within-the-industry/?sh=7e0cbba2f2c0
[7] Bad credit shouldn’t affect car insurance, experts say. States are listening, supra note 1.
[8] According to a 2019 study by the Urban Institute, a left-leaning social policy think tank, more than half of white households in the U.S. had a FICO credit score above 700, compared with just 21 percent of Black households. Another 33 percent of Black households with credit histories had insufficient credit and lacked a credit score at all, the study found, compared to just 18 percent of white households that lacked credit scores. Id.
[9] Research by the Consumer Federation, for example, has found that in ZIP codes with predominantly Black residents, consumer premiums are 60 percent higher than in predominantly white ZIP codes. That difference can amount to upward of $3,300 a year on annual premiums, according to Consumer Reports research. Id.
[10] Id.
[11] Id.
[12] Insurance Regulators Pledge To Address Racism And Discrimination Within The Industry, supra note 6.
[13] Adam Edelman, Regulators move to study racism in insurance industries. Experts say it’s not enough, NBC NEWS (August 17, 2021, 6:29 PM), https://www.nbcnews.com/politics/politics-news/regulators-move-study-racism-insurance-industries-experts-say-it-s-n1277016.
[14] Id.
[15] Id.
[16] Lyle Adriano, Is there ‘economic racism’ in insurance?, INSURANCE BUSINESS MAGAZINE (August 18, 2021), https://www.insurancebusinessmag.com/us/news/breaking-news/is-there-economic-racism-in-insurance-302652.aspx.
[17] Birny Birnbaum, the executive director of the Center for Economic Justice, has stated she would have preferred draft model legislation that explicitly addressed bias and that outlawed variables that are discriminatory with specific time frames for delivery of these projects. Regulators move to study racism in insurance industries. Experts say it’s not enough, supra note 13.
[18] Bad credit shouldn’t affect car insurance, experts say. States are listening, supra note 1.
