Auto Insurers And Discrimination

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Auto insurers  and pricing in Minority Neighborhoods from Whitney Tilson’s recent email to investors

I’ve gotten lots of great feedback on this article, most of it highly skeptical of the conclusion that auto insurers (or at least their algorithms) are unfairly discriminating against those who live in minority neighborhoods.

The high-level argument is that this is a HIGHLY competitive industry, so if some (or even most) companies were overcharging any particular group of customers, plenty of competitors, pricing the risk correctly, would step in and take the business (and remove the pricing discrepancy).

Insurers of all types have very different prices for different customers based on countless factors, which often leads to criticism that they’re unfairly discriminating, when in fact they’re FAIRLY discriminating based on different costs/risks. For example, many people object to the fact that men and women are charged different prices for life insurance and annuities, but it actually makes sense (since women, on average, live several years longer than men, men are charged more for life insurance while women pay more for annuities).

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So what might cause auto insurance rates to be higher in predominantly minority neighborhoods, even when (as the Consumer Reports/ProPublica analysis shows) there are “similar payouts on claims”? (Specifically, the CR/PP article notes that: “Over a three-year period, Illinois insurers have paid out about $172 per car each year in bodily injury and property damage claims in Nash’s [predominantly minority] zip code, 60612, according to data collected by the state insurance commission. That’s 20 percent less than the $216 per car that insurers paid out for similar claims in Hedges’ [largely white] zip code, 60657.”)


But there are many other factors that determine the cost and profitability of a policy beyond simply the annual cost per car of bodily injury and property damage claims. For example:

  • First-year business costs auto insurers ~140% of the annual premium, so insurers, to cover this high upfront cost, have to price their policies based on estimates regarding how long the average customer will remain a customer. I would bet my last dollar that low-income people (concentrated in minority neighborhoods) have a much shorter average policy length.
  • Auto insurers pay out many other types of claims beyond “bodily injury and property damage” – like auto theft, which I’d also bet my last dollar is far more likely in minority neighborhoods. (This article highlights the five major types of coverage: liability insurance, collision coverage, comprehensive coverage, personal injury protection, and uninsured/underinsured motorist protection. It’s easy to imagine that claims in many of these areas might be higher for cars located in minority neighborhoods.)


So, in conclusion, I think it’s highly unlikely that auto insurers are unfairly discriminating against those who live in minority neighborhoods. Rather, I think the higher prices reflect: a) a shorter average policy length and b) higher costs/claims/payouts across all coverages, neither of which is captured by the CR/PP analysis.


From: Whitney Tilson
Sent: Tuesday, May 30, 2017 4:43 PM
To: Whitney Tilson
Subject: Car Insurance Companies Charge Higher Rates in Some Minority Neighborhoods


The latest issue of Consumer Reports just arrived today and in it I found a very disturbing article (below) which presents extensive evidence that virtually all auto insurers charge those who live in predominantly minority neighborhoods far more than those who live “in whiter neighborhoods with similar accident costs” (my emphasis added). Here are the key paragraphs:

For decades, auto insurers have been observed to charge higher average premiums to drivers living in predominantly minority urban neighborhoods than to drivers with similar safety records living in majority white neighborhoods. Insurers have long defended their pricing by saying that the risk of accidents is greater in those neighborhoods, even for motorists who have never had one.

But a first-of-its-kind analysis by ProPublica and Consumer Reports, which examined auto insurance premiums and payouts in California, Illinois, Texas, and Missouri, has found that many of the disparities in auto insurance prices between minority and white neighborhoods are wider than differences in risk can explain. In some cases, insurers such as Allstate, Geico, and Liberty Mutual were charging premiums that were on average 30 percent higher in zip codes where most residents are minorities than in whiter neighborhoods with similar accident costs.

Kudos to Consumer Report and ProPublica for this in-depth investigative journalism, which is already leading to scrutiny and, hopefully, needed changes.


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