Insurance company underwriters are allowed to discriminate based on certain risk factors, such as owning a sports car or having a poor driving record, but they cannot practice unfair discrimination.
Unfair discrimination occurs when a company raises insurance prices based on a factor that isn’t socially acceptable, like race, gender, or religion. Although progress has been made towards eliminating unfair discrimination, it still exists in parts of our society, unjustly affecting minority groups.
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Insurance companies are allowed to discriminate based on risk
When deciding who to insure and how much to charge them
, insurance company underwriters are allowed to discriminate based on certain risk factors, such as driving history and age. Let’s imagine that you’re trying to get an Allstate car insurance quote
. If you pull up to their office in a flashy red sports car with speeding tickets stuffed into your glovebox, they’re going to identify you as a high-risk driver
and raise your rates—or deny you coverage all together. On the other hand, if you’re driving a Subaru
, parked perfectly between the lines, with a squeaky-clean driving record, your payments won’t be as high. If you don’t want to go through the hassle of pulling up to their office at all and would rather find car insurance from the comfort of your couch, you should get the car insurance comparison super app Jerry
. Jerry will find you the best rates from 50+ insurers in minutes. So, in one sense, insurance companies are allowed to discriminate—as long as the discrimination is based on factors that impact everybody equally and are directly related to car insurance. This keeps the insurance industry afloat (and allows you to have peace of mind if you get into an accident!).
Here are some more examples of risk factors that insurance companies use to set rates:
Driving habits (like annual mileage driven)
The make and model of your vehicle
Where you live (especially the crime rate)
Having anti-theft devices in your car
How long you have been driving
Types of insurance discrimination that aren’t allowed
On the flip side, insurance companies aren’t allowed to discriminate based on socially unacceptable factors, like race, sexual orientation, and religion.
Some other examples of socially unacceptable factors include:
Sexual orientation/preference
Physical or mental disabilities
It’s important to note that some factors like gender are highly correlated to risk—many studies have found that men tend to be riskier drivers than women. While gender wouldn't be grounds for an insurance company to deny you coverage altogether, gender can have an affect on your car insurance rate.
The logic behind this is simple: everybody deserves access to car insurance. Sure, some people will have to pay more (based on the factors listed in the previous section), but no single group of people can be excluded from the auto insurance industry.
Historically, this hasn’t been the case. Even in today’s society, subtler forms of insurance discrimination exist. In the next few sections, we’ll take a look at the history of discrimination in car insurance and how it still impacts insurance pricing today.
Key takeaway: Certain factors, such as race, gender, or religion, can’t be used by insurance companies when they’re deciding who to insure and how much to charge.
Insurance discrimination in recent history
To varying degrees, discrimination in the auto insurance industry has existed since car insurance was invented in 1897.
In fact, the story of car insurance discrimination starts with housing discrimination. In the 1930s, the Federal Housing Administration (FHA) began a type of discrimination that is known as redlining. The FHA created guidelines that divided neighborhoods into different zones, then charged higher rates for communities of color and directed resources away from minorities.
The practice of redlining seeped into the auto insurance industry, causing drivers in urban areas to pay significantly more for auto insurance. Though part of this increase in payment was related to the higher risk in the city, race played a disproportionate role—people of color had difficulty accessing car insurance due to the discriminatory policies.
In 1976, improvements began to sweep across the nation. Propelled by the momentum of the civil rights movement, South Carolina passed a law that guaranteed access to auto insurance for all of its citizens. Since then, courts in various states have passed laws to stamp out explicit forms of discrimination in society.
Still, according to numerous studies, subtler forms of discrimination are alive today.
MORE: How to find the best cheap car insurance
Insurance discrimination today
Recently, investigations have revealed that the use of certain factors, such as credit scores and income levels, have allowed insurance discrimination to persist in modern society.
Here’s a summary of some of the studies that provide evidence of discrimination today:
In 2007, a group of professors at UCLA performed an analysis
of redlining in Los Angeles, to see if it still affected car insurance rates. They found that, while risk factors like age and driving record were the best predictors of car insurance prices, race still played a statistically significant role. Even after taking acceptable factors into account, racial minorities in LA were charged more than white drivers.
In 2017, Consumer Reports published a study that highlighted differences in car insurance payments that were not because of risk, which they labeled “a subtler form of redlining.”
In 2020, the Consumer Federation of America (CFA) reported that, though insurance agencies don’t ask for race when they set prices, they still use data that is directly tied to race, which results in many of the same unfair outcomes.
On the other side of the fence, a 2007 study by the Federal Trade Commission (FTC) concluded that credit scores are a strong predictor of risk and only have a minor effect as a proxy for race. In other words, the FTC stated that credit scores are extremely useful to insurance agencies and don’t directly reproduce racial discrimination.
Given the growing body of evidence that suggests otherwise, though, momentum is building towards restricting the use of credit scores (and other forms of big data) that may allow racial discrimination to survive.
Key Takeaway: Though overt insurance discrimination is very rare in today’s society, subtler forms of discrimination still cause harm to racial minorities.
The next steps in removing unfair discrimination
The key to eliminating insurance discrimination, according to most advocates, is to get rid of proxies for race (like income level and credit scores) that exist in big data, increase minority representation in the industry, and educate consumers on insurance discrimination.
Within the last few years, several concrete steps have been taken to prevent unfair discrimination.
In 2019, two legislators introduced bills that sought to limit the use of credit scores in insurance pricing. Though they didn’t pass, some states have passed laws that restrict the ability of insurance companies to use credit scores.
In 2020, the National Agency of Insurance Commissioners put together a special committee to address issues of race in insurance.
In 2021, Colorado passed a bill that protects certain classes, like race, gender, and sexual orientation, from insurance discrimination.
If you’re passionate about eliminating insurance discrimination, you can help by spreading the word. Encourage your friends and family to learn more about unfair discrimination and add to the momentum towards social change.
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