Study: Drivers in Less-White Zip Codes Pay More for Auto Insurance

David Crockett, PhD:

Insurance firms use ZIP codes as a proxy for a neighborhood. Postal codes are not an unreasonable proxy for a community, but they do come with some problems. For Black and Latinx consumers, when companies use ZIP codes, they are very likely to be incorporating several factors that probably have nothing to do with how good a person is as a driver or even their propensity to pay their bills on time.

A lot of African American neighborhoods are overpoliced. Many people understand that, but sometimes what I think gets missed is the way they are overpoliced. What we end up focusing on, and rightly so, are acts of violence. But the most common interaction that anyone has with law enforcement is traffic enforcement. When you live in a community that is overpoliced from the start, you know that you will have more interactions for traffic violations. Study after study makes this clear. It's not controversial to say that Black and brown people are ticketed more often for the same kind of behavior as white drivers.

Kalinda Ukanwa, PhD:

I cannot definitively say what insurers are doing with ZIP codes since I do not have access to their risk assessment methods. What is likely happening is that auto insurers have algorithms that use ZIP codes as one of many predictors of an applicant's insurance risk. The algorithm is probably using information about the individual (e.g., driving record, credit score, vehicle, etc.) as well as the average behavior of groups he is a member of (e.g., residence ZIP code, gender, age, etc.) to predict risks for accidents, auto theft or other damages. ZIP codes may also correlate with the demographics of the residents living in the ZIP code, which in turn can be used to predict risk.

However, what is not clear is whether higher rates of theft, vandalism, accidents or other insurance risks in some ZIP codes are because there truly are more incidents in these ZIP codes or just more reporting to insurance companies of these incidents. For example, lower-income areas may have increased reporting of incidents to insurers because they do not have the ability to pay out of their own pockets for repairs. In higher-income areas, they have that ability, so residents may not report as often to insurance companies in order to avoid higher premiums down the road. A more accurate option for insurers is to look at information about the individual, such as driving record and driving habits, regardless of what other people in his ZIP code are doing.

David Crockett, PhD:

Certainly they do, but these are things that are not connected to them being worse drivers or higher accident risks. Many of these things that we are talking about now are the residue of residential segregation. Many people would be astonished to know how high the level of residential segregation is in many cities across the U.S. As metropolitan areas become more diverse with a higher proportion of Black and brown people, residential segregation rises.

In the U.S., white people claim the most resource-rich space. This happens even among white people of modest means. You may be the poorest person on the block, but you live in an area with good schools and maintained roads. On the flip side, Black and brown households of even middle-class standards are often living in the worst kinds of neighborhoods. With this imbalance, you see what a lot of people describe as the "Black tax." Black and Latinx people tend to pay premiums for certain things that are a function of the neighborhood they live in that don't have anything to do with them personally.

It is my understanding that even after we control for things like driving record, credit score or vehicle type, so that we are comparing apples to apples — Sam Jones in one neighborhood and Shaquille Jones in another community — you still see racial differences in premiums. Even when comparing the same driving record, these things are largely a function of the legacy that we have left and are still living with; that is, residential segregation.

Kalinda Ukanwa, PhD:

Credit score is most likely to have a disproportionate impact on people of color in terms of increasing premiums. Prior research well documents that people of color have lower credit scores, on average, compared to white counterparts, even when all other financial factors are equal. Many institutions use credit scores in their algorithms to predict risk, even if the risk they are predicting has nothing to do with credit risk. It would logically follow that systematically lower credit scores for people of color will translate into disproportionate increases in premiums.

David Crockett, PhD:

I want to stay in my lane because I am an inequality scholar, not a policy scholar. I do talk about policy in my work, but I do not know much about insurance policy. I can say in broader brushstrokes that a lot of this goes back to anti-discrimination policy in housing markets. It's the last thing that happened in the civil rights era, and it was the weakest kind of legislation. It caught a lot of resistance. Consider that many Black and LatinX neighborhoods are in cities that are underfunded and older inner-ring suburbs that are substantially overpoliced. I am very much in the camp of defunding the police and reallocating funds for things that contribute to the quality of life.

In many cities, Black and brown people get virtually all of the jaywalking tickets. Many of these places are infested with speeding traps. That is what those cities have to do to survive because they are underfunded from their state and federal governments. But these things raise a substantial proportion of tax revenue for many cities. But then, Black and brown people end up paying two or three times for this kind of disadvantage in increased insurance premiums. To change it, I am for strengthening anti-discrimination policy. I am less interested in seeing more people go to jail. I am more interested in policy that functions in specific ways. For example, companies should have to identify racial disparity. You have to find where racial inequality exists and do the analysis to understand underlying causes. Companies have no incentive to do that. An insurance company could say, "These things have nothing to do with us. We didn't cause any of these things to happen." It just so happens that while it disadvantages Black and brown consumers, the companies have made extra money. There has to be incentive to understand and analyze underlying causes and then to eliminate them.

Here's an anecdote of what can happen in policy and what everyday people can do. My colleague lives in a neighborhood that is several blocks of fabulous older homes. Those homes have been around for decades. They are all in pristine condition and great houses. A stone's throw from these houses is one of the poorest sections in our entire county. While we were in his home, he talked about being in negotiations with his insurance company over the premiums he was paying for being in that ZIP code. It took several rounds, but he was able to get his premium lower, based in part on what some other people in the area are paying.

Insurance companies would have you believe that their stuff is written down on tablets and carried from the mountain. Like, "This is what our algorithm said, what can we possibly do?" But all of these things are negotiable. This was not just a question of my colleague's negotiating skill, though I am sure he is skilled. In addition to these kinds of premiums, we commonly see that companies can be more attentive to white people's complaints. This is a common fact of doing business in the United States. I am working with a set of retailers right now, on these very issues, revisiting their policies. Companies must be made to be vigilant about these issues.

Kalinda Ukanwa, PhD:

Legislation that restricts the use of data about protected classes like race and ethnicity would be important. This also goes for restricted use of data that proxies for protected classes, such as ZIP codes. However, legislation should also include the requirement that companies collect data about protected classes (but not use them in their decisions) in order to enable audits of their own service decisions. This would help to detect systemic disparate impact on consumers in protected groups. Furthermore, legislation that includes a requirement for transparency in the algorithms used to make service decisions like insurance premiums would be needed. The net effect to consumers would be fairer insurance rates.

David Crockett, PhD:

Shop around. Insurance is one of those things where people can quote you radically different premiums for the same product. Research what you should be paying for your area and negotiate what you can. People must look to see what is going on in their areas around issues like this. One of my favorite organizations that I just became aware of since I have been doing this kind of work is a tiny voluntary association called the Funerals Consumer Alliance. That is a service that most of us do not want to think about. Consequently, people pay radically different prices for the same kind of service. It happens all the time. One of the things members do in the cities they are located in is price out a standard funeral. They print out a booklet and make that available. You can take action as an individual shopper, but we have a whole history in this country of consumer activism where people get together for some of these things we can't do on our own. Your negotiating skills are not better than the insurance company's. But maybe you can get together with other people facing the same kind of issues, and make some change.

Kalinda Ukanwa, PhD:

Contact your insurer to ask for details on how they arrived at the rate. Ask them what the rate would be with your profile if you lived in a different ZIP code. This may open the way to renegotiating your rate. Also, know your rights based on the state that you live in. For example, California proposition 103 restricts insurers from using ZIP codes in insurance decisions. Finally, consumers may want to look at insurance providers, such as Root Insurance, that offer telematics programs. Telematics programs use a small device installed in your car to report in real time on driving performance. In fact, most major insurers now have telematics programs. These programs use driving history and car usage to set insurance rates instead of predictors like ZIP code and credit score.

David Crockett, PhD:

This notion of the "Black tax" appears in the cost of everything. It begins to overlap with the criminal justice system in the form of increased parking tickets, traffic tickets and jaywalking tickets. It provides entrée into the criminal justice system and mass incarceration for a lot of people. They arrive there through unpaid parking tickets and speeding violations. Then, they end up driving without a license or insurance or both. This adds up.

Remember the gentleman killed before George Floyd, Philando Castile. There were dozens and dozens of interactions with the police. Ticket after ticket after ticket, but no one drives that poorly. This is a function of the neighborhood. Beyond that, I grew up in North St. Louis. My parents lived a stone's throw from Ferguson, where Mike Brown was killed. It was a feature of everyday life. There are tons of tiny municipalities that make up St. Louis county, and many of them only exist to be speed traps. That is the only reason it's an administrative unit. They don't provide services to citizens. All they do is ticket people. It can ruin your life.

Years before Mike Brown, a guy played basketball with some of his friends at an outdoor court in Ferguson. He was sitting in his car, minding his business. The guy was perfectly legal, no problem sitting there, but he was approached by a police officer, who decided to arrest him and have him charged for making a false statement to a police officer because he reported his name as Mike and not Michael, which was on his driver's license. He was a federal contractor. He lost the federal contract. He lost his license to do federal contracting because you don't have to be convicted to lose your license; you just have to be charged. That man's life was ruined over nothing. This is the stuff that contributes to the racial wealth gap.

Right now, in the U.S., white people have 10 times the net worth of other groups. In Los Angeles, the median white household net worth is about $350,000. That's a pretty significant number. The median net worth of an African American household in Los Angeles is $3,500. The median net worth of Mexican-ancestry households in Los Angeles is $4,000. In Boston, the median net worth of African American households is functionally zero. That means half of the people in the distribution have a negative net worth. These things contribute to the cost that you pay for mortgages. They contribute to being in the criminal justice system and to the rates you pay on credit cards. If you live in a "white" neighborhood and you are just as reckless on the road, it is a near certainty that you will have fewer interactions with the police. You will pay a lower interest rate on a credit card, even when we equalize everything. These small little premiums, sometimes not so small, fit together to create a story of insane inequality.

Kalinda Ukanwa, PhD:

It has the impact of taking more dollars out of the pockets of people of color. This leaves less for other financial needs in the household. Less available dollars for other financial needs such as food, rent, transportation costs and education means people of color will not be able to purchase as many resources, dollar-for-dollar, as their white counterparts with the same income. This perpetuates poverty and slows social advancement for people of color in the long run.

David Crockett, PhD:

We are in what one of my advisors used to call a "pregnant moment." There are moments in history that you know are going to be important. This is one of those. I hope we don't squander it. A lot of organizations and people in those organizations are sincere. They know there are issues. They know their organization has been part of the problem. How can we fix this? What can we do? They are beginning to look for answers.

I am working with a set of companies right now. One of my co-ops told me that decades ago, he was one of a handful of Black employees at PepsiCo when they took over the Aunt Jemima brand. There has long been opposition to that as an icon in Black America and inside the company. For years, people tried to convince the company that they needed to retire the brand. And that finally happened recently. Things look intractable until they are not. There was a sociologist named William Gamson who said, "Activists rarely understand the probability of success," and on the whole, that is a pretty good thing.

Kalinda Ukanwa, PhD:

Algorithmic bias in service decisions such as insurance premiums can have not only long-term negative financial impact on consumers, but can also have a long-term negative financial impact on the firm. So many firms use algorithms to make service decisions because they believe the algorithms improve profits. My research suggests otherwise under certain conditions. My paper, "Algorithmic Discrimination in Service," shows that if firms used biased algorithms in service decisions, this can lead to reduced long-term demand and profits because of the word-of-mouth it generates. What is surprising is that the word-of-mouth doesn't even have to be negative, yet the firms can still lose.