Robert
Robert J. Hunter Insurance Director Consumer Federation of America View bio
Birny
Birny Birnbaum Executive Director Center for Economic Justice View bio
Laura
Laura Cali National Association of Insurance Commissioners View bio

This guide was written by

Steve Evans

You may think the cost of your insurance premium is based mostly on your driving history, which is excellent. You’ve been driving for 15 years and have never had a single ticket or accident, so why shouldn’t you get the best rate? But if you’re a blue-collar worker, a widow or a renter, or if you have a lower credit score or live in an African American neighborhood, you’re likely to pay far more in your insurance premiums no matter how spotless your driving record is, according to the Consumer Federation of America (CFA). This guide looks into these practices and what you can do about them.

Discrimination Against Low-Income & Minority Drivers

At A Glance

How much more low-income drivers are charged on average, compared to high-income drivers:

59%

What Blacks in high-income communities pay compared to whites in comparable zip codes:

Up to 194% more

What percentage of their income poor to moderate income people have to pay for mandatory auto insurance:

10% to 25%

The result of unaffordable mandatory auto premiums,
according to the CFA:

More uninsured drivers on the road

What low- and moderate-income people should pay for auto insurance, according to Federal Insurance Office’s new guidelines:

2% of the median income in their zip code

Sources: Consumer Federation of America reports; Federal Insurance Office

Are You Paying More for Insurance Than You Should?

As one 2013 University of Michigan study explained, “Insurance companies are in the business of discrimination.” They group people into risk pools – like drivers with a record of speeding or DUIs — in order to legally “discriminate” against the high-risk drivers.

But what if the grouping increasingly has nothing to do with driving safety? Based on its study of minimum required auto premiums available among men and women in 15 cities from five of the country’s largest auto insurers, the Consumer Federation of America found that premiums jumped by an average of 59 percent — or $681 annually – when the profiles of the drivers were changed to reflect a lower income. The CFA, a coalition of nearly 300 consumer nonprofits that is working to end these “blatantly unfair practices,” argues that discrimination against safe low-income drivers is inherently unfair.

Consider its hypothetical case study, in which the CFA began with a profile of a married female executive who was a good driver. By changing a few things in her profile unrelated to driving (including making her an unmarried blue-collar worker), the CFA found that her auto insurance premium increased six-fold.

Executive

The CFA looked at auto insurance quotes for a female executive who:

  • is married
  • has an MBA
  • pays her insurance premiums for the year in advance
  • lives in a predominately white neighborhood

The executive also has a good credit score.

She is an excellent driver.

Total annual premium: $586
Janitor

The CFA then made a few tweaks to that profile

  • The executive becomes a high school graduate with no college. Price hike: $ 79
  • She works as a janitor. Price hike: $59
  • She has just become a widow. Price hike: $215
  • She dropped her insurance during the summer to ride her bike to work. Price hike: $864
  • She pays in monthly installments. Price hike: $60
  • She moved a few blocks to a predominantly black, lower-income neighborhood. Price hike: $650

She has less-than-perfect credit.

She is an excellent driver.

Total annual premium: $3,513

– six times more than the female MBA

African Americans Pay Up to 194 Percent More

…At least if they live in neighborhoods where more than three-quarters of the residents are African American. Those were the findings of a Consumer Federation of America study. And lest insurance companies argue that this is because the neighborhoods were poor and plagued by crime, the CFA also found the same pattern applied to affluent black communities.

The study also reveals that in many metropolitan regions, including Baltimore, New York, Louisville, Washington, DC, Detroit, Boston, and Orlando, the disparity of premiums is more than 50 percent between predominantly African American and predominantly white ZIP codes.

The CFA study notes that insurance companies often point to traffic density as the reason for higher premiums in urban areas: Drivers in major cities navigate heavy traffic and distractions. These differences might explain some level of risk and higher premiums for drivers in different areas, but the CFA study shows that average auto insurance premiums are higher in predominantly African American communities regardless of population density or affluence.

Astonishingly, middle and upper-middle income African American ZIP codes show the biggest increase over comparable white ZIPS…113 percent and 194 percent respectively,”

CFA insurance director Bob Hunter said in federal testimony in 2015.

Public Support for Low-Cost Auto insurance

Americans surveyed support low-cost auto insurance for low-income people. A survey of 1,000 Americans commissioned by the CFA found that:

  • 76 percent felt that yearly auto premiums should not be more than $500 for people earning $25,000 or less
  • 40 percent said the yearly premium should be no more than $250

What to Do If You Suspect Discrimination

  • 1

    File a complaint. In housing and lending, the federal government prohibits discrimination by race, color, national origin, gender, age, religion, marital status and whether you receive income from public assistance, but it leaves car insurance regulation to the states. Bob Hunter of the Consumer Federation of America says you should contact your state insurance commissioner if you have any reason to believe discrimination plays a factor in the rates you’re quoted.

  • 2

    Call your state and congressional leaders. If you suspect you’ve been discriminated against, Hunter advises you to complain to your legislators.

  • 3

    Contact the Federal Insurance Office. In July 2016 the FIO ruled that affordable auto insurance for low-income and minority communities should consist of no more than 2 percent of the median income in those neighborhoods – a move supported by the NAACP and the National Council of La Raza. If it’s higher than that, the auto insurance will be considered unaffordable. So if you live in a zip code that’s identified as being “majority-minority” or “majority low-and-moderate income” and are paying more than 2 percent of the median income there for auto insurance, report what you’re paying to the FIO and the local newspaper. (If you’re not sure if your zip code qualifies or what the median income is in your zip code, ask your local research librarian.)

  • 4

    Read reviews of insurance companies. Find out if other drivers think they’re being overcharged or dealt with fairly.

  • 5

    Learn how carriers decide on auto insurance rates. MoneyGeek has a guide on the often hidden factors insurance companies use to set your car insurance rate.

  • 6

    Shop around. The cost of the same type of auto insurance coverage may vary by thousands of dollars, MoneyGeek found in a nationwide analysis of car insurance data. Compare auto insurance rates in your state.

  • 7

    Be aware that different vehicles affect the cost of your policy, advises the Insurance Information Institute. A newer model sports car, for example, could cause your auto premiums to skyrocket.

  • 8

    Ask your insurance agent about discounts. These may include discounts for good students, low mileage and taking a defensive driving class, as well as raising your deductible and bundling your homeowners and auto insurance and – of course – having a good driving record.

Uninsured Drivers, Blighted Lives

“Auto insurers have started to use factors that have no relation to risk and loss,” such as credit scores and occupations, says the CFA’s Robert Hunter. This practice, he says, exacts a high toll. In 2016 congressional testimony about the CFA’s research findings, Hunter said:

There is no doubt that millions of safe-driving, lower-income Americans cannot afford state-required auto insurance. If mandated insurance is unaffordable, low to moderate income Americans are faced with an awful choice: either give up their car…or drive uninsured and face ever-toughening legal consequences. Over one-third of the low to moderate income drive uninsured, many by necessity.”

Mandatory insurance is often priced at $1,000 and may be as high as $3,000 or more, even for a household earning $12,000 a year, according to the CFA. The CFA has denounced what it calls “the outrage of states requiring insurance that is unaffordable for many Americans.”

The CFA recommends that insurance cost poor and moderate income people no more than 2 percent of their income for car insurance, which is what some California counties charge drivers in the state’s low-cost insurance program.

California’s low-cost car insurance plan, says Hunter, “uses no subsidies and is priced so reasonably because good drivers who are poor are good drivers by any standard. Why other states have not adopted this sort of strategy to help their poor afford the auto insurance the states require escapes me.”

CFA’s Illinois Study: Good Driving Records Trumped by Race, Credit Scores and/or Marital Status

In a study of drivers in the state of Illinois, the CFA found that:

  • Good drivers living in predominantly African American neighborhoods in the Chicago region are charged 23 percent more for basic liability insurance than drivers in predominantly white Chicago region neighborhoods even when adjusting for income and density
  • Single or widowed women with perfect driving records in Chicago are charged as much as 21 percent more for basic coverage than married women living in the city with similar records.
  • In Illinois, State Farm charged a good driver with a low credit score as much as 123 percent more for basic insurance than a driver with a high credit score.
  • Allstate, Progressive, and Farmers offer no discount for low-mileage policyholders, charging the same premium to a good driver in Chicago whether she drives 5,000 miles or 20,000 miles annually.

Insurers have criticized CFA’s statement’s that the auto industry is “high uncompetitive.” The Insurance Information Institute responded that low-income drivers have dozens of carriers competing for their business.

And although federal law outlaws discrimination by age and gender in lending and housing, auto insurance representatives noted that state regulators allowed them to use those factors when setting auto premiums. One Progressive spokesperson interviewed by Insurance Journal asserted that “non-driving-related” factors had, in fact, been shown to predict the likelihood of a car crash. He did not give any details, however.

Insurance Discrimination: What Are Policymakers and Insurers Doing About It?

“Discrimination by insurers in the underwriting process is largely unregulated at the federal level,” according to a recent University of Michigan study. That leaves the policing to state insurance regulators.

One practice that has crept in under the radar is price optimization – a practice in which insurers use big data to find consumers who are unlikely to shop around for a better price and then raise their rates.

“The reason insurers can successfully use price optimization is that Illinois insurance markets are not competitive – allowing insurers to charge more than cost-based prices,” says Birny Birnbaum with the Center for Economic Justice “If consumers had the market power to discipline insurers, there wouldn’t be price optimization in the first place.”

There are also privacy concerns when comparison shopping for auto insurance.

“Today, shopping for insurance means giving every insurer you apply to huge amounts of personal information,” Birnbaum says. This includes credit history as well as personal information that may have nothing to do with insurance coverage.

States that prohibit
“price optimization”

So far 16 states and the District of Columbia have ruled that “price optimization” violates state law. States that have prohibited the practice outright include California, Florida, Maryland and Ohio. The National Association of Insurance Commissioners has also voted to adopt a white paper setting guidelines on the practice.

However, the NAIC disputes the suggestion that the insurance industry discriminations against low-income drivers. In a 2015 report, NAIC president Robert Hartwig says “the assertion that low-income consumers are particularly vulnerable because they do not shop around is…entirely unsubstantiated.”

The NAIC has expressed concern, though, over auto insurance affordability. According to Laura Cali of the association, four years ago the association created a working group to study the issue. According to the CFA, however, it has “failed to make any meaningful progress.”

What If You’re Homeless?

Since low-income Americans are often only a paycheck away from being homeless, an emergency – including the loss of a job, a car accident or a large rent hike – may push them over the edge.

Of the estimated 600,000 homeless Americans, which includes veterans, students and families, about 30 percent who aren’t in shelters are living in their cars or trucks, according to Graham Pruss, former director of Seattle University’s Vehicular Residency Program. For them, a vehicle may be all that stands between them and the streets. Besides offering protection against cold and rain, Pruss has said, it’s much safer to sleep in your car than on the streets.

Unfortunately, the number of laws that ban sleeping in vehicles “has exploded across the country since 2011, increasing to a greater degree than any other form of criminalization law,” reports the National Law Center on Homelessness & Poverty. “The effect of these laws is to force homeless people from what may be their only option for safe refuge onto the public streets – where it may similarly be illegal for them to sleep.”

According to homeless advocates and the former homeless, the best places to sleep undetected in your vehicle are truck stops and highway rest stops, camp sites, residential neighborhoods (near a home but in front of a side fence) and in designated “safe” parking lots — if the community offers them. Advocates advise using blinds or curtains for privacy.

Car insurance and the homeless

Carrying car insurance while homeless may seem like an unreasonable or frivolous expense, but it’s important for holding on to your vehicle. You may be stopped by the police, for example, who in most states can demand proof of auto insurance on the spot. Without this proof, your car could be impounded and you’ll likely face a fine, plus the cost of vehicle storage and possibly towing charges. If it happens again, you could be looking at jail time, too.

Living out of your car makes it far more likely that you’ll encounter a police officer asking questions about your circumstances, so you’ll need to be prepared. Proof of car insurance is part of being ready. Many states allow you to show proof of insurance on a smart phone, although keeping a copy of your insurance card in the glove box is a simple and worthwhile backup.

What you need to do:

  • Keep your car insurance current: Pay the premiums. This may be a real hassle when you don’t have a home or perhaps even a job, but if you plan to live out of your car, it’s the best way you can protect yourself.

  • Set up an automatic bill payment with your insurance company and your bank. You have enough to do right now without keeping track of envelopes, postage and paper bills. Plus, unless you know someone who can receive your mail or you can afford a P.O. Box, you won’t be able to get monthly bills in the mail while living in your car. The only alternative is to pay for auto insurance months in advance, which is impractical when money is tight.

  • Confirm payment online using a smart phone or a public computer with Internet access at the local library. With automatic bill payment, you can usually be notified by email or text message when a payment is complete.

  • If you own your car outright, find out the minimum car insurance required in your state. You might be spending more money than you need to. If you’re still making payments on a new vehicle, your lender may require you to carry comprehensive coverage to protect the investment, so cutting back on insurance may not be an option.

  • No matter where you live, it pays to know the insurance rules in your state. This state-by-state guide to auto insurance covers what you need to know in your area. If you’re a student, senior citizen or veteran, you may also be eligible for discounted auto insurance, so ask about this when getting quotes.

Robert J. Hunter of the CFA: “We Need to End These Cruelly Unfair Practices”

expert Bob Hunter Expert

Bob Hunter is director of insurance for the Consumer Federation of America. He is a former Federal Insurance Administrator under Presidents Ford and Carter and the former insurance commissioner for Texas, and he ran the National Flood Insurance Program under the Department of Housing and Development (HUD). He has also worked for private industry groups such as Atlantic Mutual and won national awards for his consumer service. He here talks about the CFA’s fight to end what he calls “cruelly unfair” auto insurance discrimination against low-income people and minorities.

Why are insurance companies charging low-income people for things that have nothing to do with their driving?

“These insurance practices have snuck into the industry’s ‘class system’ over the last two decades, a little at a time, and now here we are. They’re charging people now for things that have nothing to do with risk and loss. Creating new risk groups allows them overcharge without being accused of discrimination.

“We’re calling on state insurance departments and legislatures to end these unfair practices, which have especially adverse impacts on low-income consumers and people of color.”

How does “price optimization” fit into that?

“In recent years, insurance companies – with little or no disclosure to regulators – began using ‘price optimization’ to raise customers’ premiums based on their shopping habits. Insurance companies use vast amounts of consumer data to determine how much they can increase rates for each individual customer based on his willingness to pay [higher prices]. The price increase is totally unrelated to the likelihood that a consumer will cause an accident or file a claim…They also charge more based on credit scores, occupation and other factors that have nothing to do with safe driving.

You’ve used the phrase “cruelly unfair” to describe these practices. Could you elaborate on that?

It is draconian because states require the insurance, states fail to regulate the pricing classes so insurance becomes more and more unaffordable, and the state fines or even jails the good driving poor who chose to drive uninsured. [It’s] like a Charles Dickens story.”

Are there signs that state legislatures are beginning to address this concern?

Yes, in a few states – Maryland, Michigan, Montana and a few others. The Federal Insurance Office is looking into the problem and is doing surveys on it. This has gotten the National Association of Insurance Commissioners’ attention as well.

Since auto insurance is a legal requirement in 49 of the 50 states, are some people who are unable to afford insurance giving up their car?

Some have given up, but most decide to drive uninsured. A car is essential in modern America. The poor need to get to work, to get to better shopping and to get education for their kids.

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