The Auto Insurance Advantage: Rich Neighborhoods And Their Secrets

Do rich neighbourhoods have better auto insurance? The answer is not exactly. While it is true that people with more money tend to pay less for car insurance, this is not because they are rich, but because they tend to be better educated, married with children, and have higher credit scores. Actuarial studies have shown that people in these circumstances have fewer accidents and claims, making them a more affordable risk for insurers. In addition, some states allow insurers to use factors such as occupation and credit scores when calculating risk, which can result in higher prices for minorities.

Auto insurance premiums are higher in minority neighbourhoods

In a study of premiums and payouts in California, Illinois, Texas, and Missouri, it was found that some major insurers charged minority neighbourhoods up to 30% more than other areas with similar accident costs. This disparity remained even when controlling for factors such as age and accident history.

In Illinois, out of 34 companies analysed, 33 were found to be charging at least 10% more, on average, for the same safe driver in minority zip codes compared to majority-white zip codes. Six Illinois insurers, including Allstate, had average disparities higher than 30%.

In Missouri and Texas, at least half of the insurers studied charged higher premiums for a safe driver in high-risk minority communities compared to majority-white communities with similar risk. In California, eight insurers were found to have prices in risky minority neighbourhoods that were more than 10% above similar zip codes where more residents were white.

The impact of these disparities can be devastating for minority communities, creating a roadblock to upward mobility and increasing the burden on those who are already financially disadvantaged. This is especially true since auto insurance coverage is required by law in almost all states.

While the reasons for these disparities are not entirely clear, it may be due to longstanding practices from an era when American businesses routinely discriminated against non-white customers. It is also possible that the algorithms used by insurers inadvertently favour majority-white neighbourhoods over minority ones.

These findings highlight a pattern of racial disparities that cannot be explained by differences in risk alone and suggest that minority neighbourhoods may be facing a subtler form of redlining, where they are denied services or charged higher prices.

Insurers claim higher premiums are due to higher risk of accidents

Insurers claim that higher premiums are due to a higher risk of accidents in certain areas. This is based on the frequency of claims in a given ZIP code, with insurers designating neighborhoods as high risk if they receive a lot of auto insurance claims. As a result, car insurance companies quote higher premiums in these areas to offset their potential costs. This means that people living in high-population areas, which have a higher chance of car accidents, will likely pay more for their insurance.

Insurers also take into account harsh weather conditions such as heavy rain, hail, or snow, which can lead to a higher number of accidents. Additionally, they consider the likelihood of vandalism or theft in a particular neighborhood, as well as the unemployment rate, which can result in people forgoing car insurance. These factors contribute to the determination of car insurance rates by ZIP code and state.

However, this reasoning has been contested, as some argue that the disparities in insurance prices between minority and white neighborhoods are wider than the differences in risk can explain. In some cases, insurers have been found to charge premiums up to 30% higher in minority neighborhoods compared to whiter neighborhoods with similar accident costs. This has led to accusations of a subtler form of redlining, where minority areas are denied services or products.

The impact of higher insurance prices on low-income earners

Auto insurance coverage is required by law in almost all states. If a driver can't pay for insurance, they can face fines for driving without insurance, have their license suspended, and eventually end up in jail for driving with a suspended license. Higher prices also increase the burden on those least able to bear it, forcing low-income earners to opt for cheaper, less reliable providers or forgo other necessities to pay their car insurance bills.

In the US, yes, rich people need car insurance, if only because every state (but two) has some minimum insurance requirement to legally drive on the road. Even "rich people" like Bill Gates would probably still prefer not to have to give up large out-of-pocket payments where possible.

However, it is not just a question of affordability. In some cases, insurers such as Allstate, Geico, and Liberty Mutual were charging premiums that were on average 30% higher in zip codes where most residents are minorities than in whiter neighborhoods with similar accident costs. This disparity may amount to a subtler form of redlining, a term that traditionally refers to the denial of services or products to minority areas.

Minority neighborhoods pay higher car insurance premiums than white areas with the same risk. For example, Chicago's East Garfield Park, a predominantly minority neighborhood with a high crime rate, is safer from an auto insurance perspective than the more affluent, largely white Lake View neighborhood. Yet, a resident of East Garfield Park pays almost four times as much as a resident of Lake View.

In all four states examined (California, Illinois, Texas, and Missouri), there were significant gaps between the premiums charged in minority and non-minority neighborhoods with the same average risk. In Illinois, of the 34 companies analyzed, 33 were charging at least 10% more, on average, for the same safe driver in minority zip codes than in comparably risky white zip codes.

The impact of the disparity in insurance prices can be devastating for low-income earners, acting as a roadblock to upward mobility or even getting by.

In addition, some insurers consider other factors beyond the risk of accident payouts in setting rates. Such criteria as credit score and occupation have been shown to result in higher prices for minorities, who tend to lag behind whites in income and may already be hard-pressed to afford the higher payments.

Overall, individuals in families with employer coverage spend 2.7% of their income on the worker contribution to enroll in employer-based coverage and another 1.3% of their income on out-of-pocket spending. Among people with employer-based coverage, the share of family incomes spent on health insurance premium contributions and payments for medical care varies considerably by income. For those in families with incomes at 199% of the federal poverty level and below, the average family payments for health insurance premiums and medical care combined average approximately 10.4% of family income. Meanwhile, those in families with incomes at or above 400% of the federal poverty level pay about 3.5% of family income on premium contributions and medical expenses.

People in lower-income families with employer coverage spend a greater share of their income on health costs than those with higher incomes, and the health status of family members is associated with higher health-related expenses.

The history of redlining in auto insurance

Redlining is a discriminatory practice that has been used in the United States and Canada for many years. The term was first used in the 1960s by sociologist John McKnight and community activist William Julius Wilson to describe the way banks and other financial institutions would draw red lines on maps of neighbourhoods, indicating that they would not offer loans or other services to individuals living within those boundaries. These neighbourhoods were often predominantly Black or Hispanic, and the practice was used to maintain segregation and prevent these communities from accessing the same opportunities as their white counterparts.

In the context of auto insurance, redlining refers to the practice of charging higher prices for insurance to certain neighbourhoods or communities, often within a racial context. Auto insurance companies may be accused of raising prices in areas where people have lower incomes or denying coverage to people of certain races or ethnicities. This can result in higher insurance costs and contribute to a continuous cycle of economic inequality.

The term redlining gained widespread attention in the United States when reporter Bill Dedman published a series of articles exposing the practice. His work, titled "The Color of Money: Home Mortgage Lending Practices Discriminate Against Blacks," received the Pulitzer Prize and increased conversation around redlining, leading to changes in how some places looked at lending money and providing insurance.

Despite laws prohibiting the consideration of race or ethnicity in selling insurance policies, redlining still occurs today. Insurance companies can use zip codes, crime rates, and accident rates to calculate insurance premiums, which can appear to be based on race when certain communities are predominantly African-American or other races.

The impact of redlining in auto insurance can be seen in a 2015 study by the Consumer Federation of America (CFA), which found that drivers living in predominantly Black neighbourhoods paid 71% more for car insurance than those in predominantly white neighbourhoods. Similarly, drivers in Hispanic neighbourhoods paid 29% more. This practice has been found to disproportionately affect individuals living in predominantly Black and Hispanic neighbourhoods, leading to higher insurance costs and economic inequality.

While some states have implemented laws prohibiting the use of certain factors like zip codes in determining insurance prices, redlining continues to have a profound effect on communities. The legacy of this discriminatory practice contributes to economic disparities and limits opportunities for people of colour.

How auto insurance premiums are calculated

Auto insurance premiums are calculated based on a variety of factors, some of which are within the driver's control, while others are not. Here are the key factors that influence the cost of auto insurance:

Driving Record

The better one's driving record, the lower their insurance premium. Accidents, serious traffic violations, and a lack of an insurance track record can all lead to higher premiums. Additionally, new drivers are often considered higher-risk and may face higher rates.

Vehicle Usage

The more one drives, the higher the chances of an accident. Therefore, those who drive for work or commute long distances are likely to pay more. Conversely, occasional or pleasure drivers tend to have lower premiums.

Location

Urban drivers generally pay more for auto insurance due to higher rates of vandalism, theft, and accidents. Specific locations within a city can also impact rates, with secure parking or anti-theft features potentially lowering premiums.

Age

Mature drivers tend to have fewer accidents, so insurers charge lower premiums to this demographic. Teenagers and young people below the age of 25 are considered higher-risk and usually face higher rates.

Gender

Statistically, women tend to have fewer and less severe accidents than men. As a result, women often pay less for auto insurance in states that allow gender to be considered when setting premiums.

Vehicle Type

The cost of insuring a vehicle depends on factors such as repair costs, replacement value, theft likelihood, engine size, safety record, and the potential damage it can inflict in a collision.

Credit Score

Insurance companies in most states consider credit scores when calculating premiums. A higher credit score typically leads to lower insurance premiums.

Type and Amount of Coverage

Insurance premiums rise as more coverage is added. This includes liability coverage, personal injury protection, comprehensive and collision coverage, rental car coverage, and windshield glass coverage.

Deductible Amount

The deductible is the amount one pays out-of-pocket when filing a claim. A higher deductible typically leads to lower insurance premiums, but one should ensure they can afford the deductible amount in case of an accident.

Claims History and Insurance History

A history of frequent claims suggests a higher risk of future claims, leading to higher premiums. Lapses in coverage and failure to pay premiums can also increase costs.

Insurance Company

Different insurance companies charge varying premiums for the same type and amount of coverage. Shopping around and comparing rates from multiple providers can help identify potential savings.

Frequently asked questions