According to a study released by the Consumer Federation of America, drivers living in predominantly African American ZIP codes are charged 70% higher premiums than similar drivers in largely white communities, even after accounting for population density and income levels. This is a difference of over $450. Which doesn’t make sense. surely one of the hundreds of US carriers would want that business enough to offer a better rate. Yet they don’t.
Because it’s a bit more complicated. predominantly African American ZIP codes are on average much tougher places than those that are predominantly white. On average crime and the proportion of uninsured drivers are quite a bit higher in African American neighborhoods, leading to higher insurance losses for the average policy. But the question still stands: why are rates so much higher for a driver with the same risks depending upon the neighborhood?
The truth is that carriers have historically have not been able to pick out the better risks in tough neighborhoods. This is because:
- Carriers can’t find and exclude underwriting fraud. Fraud is about 20% of premiums written and where those premiums are higher, fraud is too.
- Carriers have a very limited ability to interact with customers during the transaction, which means customers can’t correct inaccurate information or provide the type of documentation and images that reduces premiums. For example, inspecting a vehicle to identify damage at the point of sale reduces the risk of preexisting damage claims and therefore premiums but carriers find this too costly for the amount of benefit.
- Carrier underwriting systems are inflexible and expensive to change. They are bad at handling the special interaction necessary to identify better risks.
Well it’s a bit more complicated. Certainly there are many insurance carriers who would love to offer competitive rates to good customers regardless of their race or where they live and they would do so if they could find them. Your insurance rate is heavily influenced by the losses experienced in the neighborhood where you live. Live in a safe suburb, you’ll get a lower rate than if you live in a high crime inner city neighborhood. That’s because all sorts of insurance losses are more common in the tougher neighborhood.
And carriers have a whole host of problems differentiating between risks.