Does Redline Auto Insurance Still Exist?
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Michigan drivers pay an average of $ 983.60 per year for car insurance. If that sounds like a lot, consider that figure includes fares in Detroit, which average $ 10,723.22. Some argue that the incomes and skin tones of many residents may have something to do with the sky-high rates. They say Michigan insurance companies are engaging in a discriminatory practice and are creating what is called redline auto insurance.
Detroit is not alone. A recent study by the Consumer Federation of America found that drivers living in low-income zip codes pay more for auto insurance than other more affluent – and often whiter – drivers. But is redlining really to blame for the higher urban premiums, or does higher risk drive prices up?
Insurance companies deny that redlining still exists, but critics say it is pushing up prices and reducing access to auto insurance and auto insurance in neighborhoods most in need of protection.
What is the red line?
Researchers use the term “redlining” to refer to a few different practices.
“The clearest way to think about it is refusing to provide insurance or changing available insurance terms unrelated to the claimant’s risk, a process that is more likely to take place in neighborhoods with high concentrations of people of color, ”said Gregory Squires, chairman of the sociology department at George Washington University.
When researchers discuss redlining, they usually talk about refusing to write policies.
In the 1960s, according to Squires, “at risk” (that is, majority minority) postal codes were often marked in red on insurer maps, indicating areas where agents were not to write policies.
Companies have also long adopted what Squires calls “arbitrary underwriting guidelines,” which persisted after most cards disappeared. “Some companies wouldn’t write policies on homes that are over 50 years old or worth less than $ 100,000. These groups targeted minorities who were more likely to live in older, lower value homes. “
Other researchers have explored the idea that insurers price policies in minority neighborhoods disproportionately to the risk, making it difficult for residents to find cheap insurance. Some also call this redlining, or reverse redlining. Some Detroit residents and politicians accuse insurers of redlining in their city, where a two-block move DetroitThe city’s limits can result in thousands of dollars in additional auto insurance costs.
Do insurance companies continue to apply the red line
Insurers say redlining is a thing of the past. Lawsuits have drawn attention to most discriminatory underwriting guidelines, and companies cannot consider race or ethnicity when pricing policies. Yes owners or drivers in urban areas can’t get insurance – or if it’s too expensive – insurers suggest that the pricing reflects the risks that the insured or their neighborhood pose.
Martin Grace, professor of risk management at Georgia State University, believes discriminatory practices have become very difficult for insurers to maintain. “If you refinance, you’re almost always in a market for a new insurance policy. And home insurance is really competitive. But if someone bought their house 50 years ago, with a policy with very high rates, they might still have that business. “
He adds, “I think it’s possible that companies could discriminate, but if they did and it was found out, it would be a black eye.
However, University of California Los Angeles professors Paul Ong and Michael Stoll have found evidence that insurance companies price policies differently in low-income minority neighborhoods. In their article “Redlining or risk?The pair found that higher risk factors – including crime and claim rates – led to higher premiums in minority-dominated Los Angeles zip codes, but they did not explain all of the differences in price between these neighborhoods and predominantly white neighborhoods.
Ong and Stoll found that drivers in low-income black neighborhoods paid an average of $ 154 more in insurance than their high-income or white counterparts. Only 11% of the variance was due to risk.
“After releasing our initial result, the insurance industry wanted us to re-examine the research with ‘better’ data that they would provide,” Ong said. “After negotiations and delays, they decided not to cooperate.”
Even though insurers can’t use the race to write or rate policies, and even if risk and pricing are aligned, Squires argues that insurers can still discriminate. “You always see where the agents open their offices. Many insurance companies also use credit information as an underwriting tool, which is problematic because it says nothing about a person’s insurance risk. And the use of these reports negatively affects racial and ethnic minorities, who tend to have lower credit scores in general. “
Is the highlighting wrong?
“Highlighting for ethnic, gender or religious reasons is inappropriate,” said Ron Garcia, former senior deputy director of Fannie Mae. But, in his opinion, companies and individuals often stand out in other ways. “Capital markets are the red line everywhere. Starbucks only opens where they can get a return on their investment, depending on the community. You decide where you want to shop based on where you feel comfortable.
Yet he recognizes that insurance companies have a greater responsibility to consumers than cafes. “We all have an interest in people having auto insurance. If we’re in an accident we want the person we are in an accident [with] be insured, ”he said.
No one is required to drive or own a home. But the ability to drive increases employment opportunities and, as Squires points out, “the unavailability of home insurance” – a condition for home loans – “makes home ownership unavailable.”
“Neighborhoods that are victims of redlining are also victims of predatory loans, food deserts and poorer schools. Unavailability of insurance is just another evil, ”Squires said.
What Can Consumers Do About Expensive Insurance Premiums?
Whether or not this is the result of discrimination, homeowners and drivers in cities generally pay more for their insurance.
Grace thinks this will subside as the bounties get more granular. “Now insurers and real estate agents have access to better information on specific homes. In the old days, they just assumed any house in an older neighborhood was a fire hazard.
In the meantime, you can always compare prices. Additionally, Garcia advises consumers to look for government programs that can make insurance more accessible or affordable. CaliforniaThe low income auto insurance program is a good place to start for some drivers.
If consumers have evidence of discrimination, they can also file a complaint with their state insurance commissioner, the Department of Housing and Urban Development (HUD), or the Department of Justice. Squires also suggested contacting the National Fair Housing Alliance. “It could be your most effective remedy,” he said.
Squires points out that governments also have a role to play. “Congress could enact an insurance disclosure law similar to the Home Mortgage Disclosure Act, which would require companies to report the census tracts they insure. “
“The onus should not fall on the victims of this process,” he added.
Driver and car photo via Shutterstock.