Getting Car Insurance? Your Zip Code Matters

First, many thanks to Amy Schmitz for inviting me to guest blog on My Consumer Tips. I’m excited to share some of the consumer credit issues I’ve happened upon during my work. My research includes empirical studies of bankruptcy and consumer credit. (Read more about me here.) Along with my co-authors on some articles, I’ve written about racially disparate uses of consumer bankruptcy by families and business bankruptcy by churches. This research is part of a growing body of research finding that lower-income individuals and minorities pay more for goods and services and, on average, receive less. This week, ProPublica and Consumer Reports published a new study that adds auto insurance to the list of services for which minorities pay more.

Although I blogged about the study briefly over at Credit Slips, I want to spend more time discussing the findings here. The study analyzes car insurance premiums and payouts by zip code in four states, California, Illinois, Texas, and Missouri. It finds that major insurers charge up to 30 percent more for insurance in minority neighborhoods than white neighborhoods with the same risk (meaning with similar accident costs). To put some numbers to this finding, the report begins with the stories of Nash and Hedges. Nash lives in a neighborhood in Chicago that from a car insurance perspective is safer than the Chicago neighborhood where Hedges lives. Nash’s neighborhood is predominately minority, while Hedge’s neighborhood is predominately white. Nash is 26 and drives a 2012 Honda Civic LX. Hedges is 34 and drives an Audi Q5 Quattro SUV. Both Nash and Hedges are employed and both receive a good driver discount. Who pays more for car insurance?

If you guessed Nash, you’re right. But what is more interesting and perhaps unexpected is how much more Nash pays. He pays $191 a month. Hedges pays $55, almost four times less than Nash. Why does this matter? Nash’s story includes struggling to make that hefty monthly payment while support his wife and daughter by working two jobs. An extra $140 a month would go a long way to easing Norm’s mind about making ends meet.

Moving beyond these two stories, the study confirms what some consumer advocates have suspected for years: That auto insurers seem to be using zip code as a proxy for race, and charging minority neighborhoods more for insurance, despite the fact that these drivers are just as safer as drivers in white neighborhoods and despite the fact that cars “residing” in these neighborhoods are no more likely to cost insurers more in payouts than cars in other neighborhoods. Consumer advocates’ assumptions about auto insurance were based on prior knowledge that where someone lives matters to economic opportunity and mobility. Auto insurance premiums now can be added to the list of the ways in which lower-income individuals and minorities pay more, and which hinder their efforts to save and achieve economic security. Read the full study here.

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