Report finds potential racial bias in auto insurance premiums

The D.C. Department of Insurance, Securities and Banking (DISB) released a study directed by Karima Woods, DISB Commissioner, that examined potential unintentional bias in private passenger auto insurance premiums of Black and Hispanic drivers in Washington, DC.

The study reveals that Black drivers pay 46% more than white drivers and Hispanic drivers pay 20% more. 

"This investigation is a key step toward understanding and addressing financial barriers that could unfairly have an impact on certain racial groups. Our goal is to ensure that D.C. residents are treated equitably, regardless of race, and that insurance premiums reflect actual driving risk," Woods said in the news release.

The average annual premium is $705 for white drivers and $722 for Asian and Pacific Islander (API) drivers, but $1,031 for Black drivers and $849 for Hispanic drivers. Between Black and white insureds, the average premium gap is $326.

The study notes that Black and Hispanic drivers incurred claims at a higher rate than white drivers, and further examination is needed to understand and address these differences.

According to the Consumer Federation of America (CFA), the use of consumer credit history by auto insurers in setting premiums is one of the most likely drivers of this price disparity. Research from the CFA's 2023 "The One Hundred Percent Penalty" report revealed that drivers in DC with an excellent credit score pay an average annual auto insurance premium of $557 and those with fair credit pay $854. Consumers with poor credit pay an average of $1,306 annually, which is a 234% increase compared to those with an excellent score. CFA notes that data shows that Black and Hispanic consumers have lower credit scores on average than white consumers.

"The price setting algorithms of insurance companies are broken, and people of color are paying the price," said Michael DeLong, CFA's research and advocacy associate, in a press release. "Insurers use a range of non-driving factors, such as a customer's credit score, their job title, and even whether they went to college, to determine how much a driver pays. Companies should never be allowed to punish people because of their socioeconomic status, and especially not when the product is mandated by the government."

Robert Gordon, senior vice president of policy, research, and international at the American Property Casualty Insurance Association (APCIA), responded to the DISB report.

"Through its own analysis to ensure rates are not unfairly discriminatory, DISB confirms that differences in premiums are driven by differences in losses, and the systems insurers use to produce quotes reasonably reflect the policies offered to insureds and are reflective of the sound risk-based pricing methods being used in the market. Insurers use a variety of actuarially sound and predictive driving and non-driving rating variables to fairly and accurately price policies, which benefits consumers with lower rates overall, more choices, and greater market and price stability," Gordon said in the news release.

The APCIA affirms that insurers do not use variables such as race and ethnicity in rating, and that premiums are driven by losses and claims.

"It is critically important to understand that insurers do not collect race information and do not use race information in any way, including to set insurance premiums. While DISB created and used racial categories in its report, insurers base rates on risk, not race. DISB's analysis found that, whenever a group paid higher premiums, it also had more accidents, more claims, and generated more in losses, and therefore this group paid more in premiums. Higher losses and more claims translate into higher premiums," stated Gordon. "Based on the extensive data collected by DISB, the report proves that insurance premiums accurately reflect insured losses. Instead of more costly analysis of insurance rating factors, which again will show that premiums accurately reflect risk, the best next step would be to work together to help bring down the underlying losses so that premiums can decline, especially for those who are paying the most.  Not only would this improve insurance costs but would also help save lives and prevent injuries and related economic losses."