New Bill Would Prohibit Use of Socioeconomic Factors in Auto Insurance

By: Michael DeLong, CFA Research and Advocacy Associate

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Last week, Senator Cory Booker (D-NJ) introduced an important bill — the Prohibit Auto Insurance Discrimination (PAID) Act. In a statement, Booker said that “The use of factors unrelated to an individual’s driving record to determine auto insurance rates and eligibility is unfair and hurts working families,” and called for the elimination of these factors.

Already present in the House, where it is sponsored by Representatives Watson-Coleman and Tlaib, the PAID Act would be a big win for both consumers and social justice.

How so? The PAID Act would prohibit unfair discrimination in auto insurance by banning auto insurers from using socioeconomic factors to determine if consumers are eligible for auto insurance and to increase their premiums. The bill would forbid the use of “income proxies such as a driver’s education level, occupation, employment status, home ownership status, credit score, consumer report, previous insurer, and prior purchase of insurance.” Insurers currently use the above factors as proxies for income, and indirectly for race, and they contribute mightily to systemic racism.

These qualities “unfairly discriminate against people for reasons that have nothing to do with their driving records. This makes auto insurance more expensive and less accessible to millions of Americans and has the additional effect of increasing the number of uninsured motorists, which raises premiums for everyone on the roads. People should be rated on how they drive, not their job title or if they lost their job; not whether or not they went to college; or whether they rent or own their home; or if their credit score has fallen,” stated CFA Insurance Expert Doug Heller.

Back in June Consumer Federation of America conducted a short analysis and found that when socioeconomic factors like income, occupation, education level, credit score, and others are used in calculating auto insurance costs, they greatly affect African-American consumers and force them to pay higher prices. Insurers claim that the factors are race neutral, but they are not. To give just a couple of examples:

Homeownership is not related to driving, but it is related to race. And data from the U.S. Census Bureau 2018 American Community Survey show that while 30.4% of white Americans are home renters, 58.6% of African-Americans are renters. Therefore if homeowners pay less for auto insurance, that will disproportionately benefit white Americans and harm Black Americans.

And credit scores have no relation to whether someone is a good driver or likely to get into an accident. However they are discriminatory and people can have bad credit scores for a variety of reasons, including many circumstances beyond their control. If someone has a credit score lower than 620, they face a significant penalty, and have to pay more for auto insurance. 5.4% of white Americans have a credit score below 620, but 21.3% of African-Americans do — another legacy of systemic racism, and another example of how using these factors in pricing auto insurance contributes to racism and inequality.

As previously noted, fewer African-Americans own homes, fewer have a bachelor’s degree, and credit scores of African-Americans are lower on average than the credit scores of white Americans. These statistics are the results of decades of systemic racism, both formal or informal.

The result? Even though African-Americans are, on the whole, lower income, they wind up paying more for auto insurance, further reinforcing systemic racism and discrimination. In 2015, CFA conducted an extensive report on racial discrimination and auto insurance. We found that in communities where over 75% of residents are African-American, auto premiums are on average 70% higher than in places where less than 25% of residents of African-American ($1,066 vs $622). This was true even when controlling for all other circumstances. In dense cities, the average premium in mostly African-American zip codes was $1,797 compared to $1,126 in mostly white zip codes — 60% higher!

The PAID Act would put a stop to that and consumers would get a two for one deal: it would help consumers and reduce racial inequality, by working to ensure that consumers are charged more fairly for auto insurance regardless of their race.

CFA is urging the Senate to quickly hold hearings on this bill and ask for input from consumers and organizations around the country. The United States is currently deep in the grips of a deadly pandemic and a deep economic downturn, and consumers are suffering. Their voices should be heard. The PAID Act, along with other consumer relief measures, should be a top priority for Congress.

How can you help get the PAID Act passed? Call your member of Congress and urge them to become a cosponsor of the bill (H.R. 3683 in the House). Additionally, urge them to hold hearings on the PAID Act, and for those hearings to include consumer advocates as witnesses.

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