California tries to curb discrimination in auto insurance pricing

California officials proposed a rule on Tuesday that would cut discriminatory pricing practices being used by auto insurance companies in the state.

The California Department of Insurance found in a recent investigation that many insurers have been selling higher-priced auto-insurance policies to people of color and low-income drivers in the Golden State, by more frequently offering discounts on insurance premiums to more affluent, white drivers.

Insurers are supposed to determine auto-insurance rates in California based primarily on a customer’s driving safety record, miles driven annually and years of experience, said Jamie Court, president of Consumer Watchdog, a consumer advocacy group. All other factors must count less than these three and be substantially related to an insurer’s risk of loss from a particular customer or group.

Discriminatory pricing practices could lead to marginalized groups paying rates that are up to 26% higher than their privileged counterparts, California’s investigation found. That could equate to several hundred dollars in additional insurance premiums annually, according to Court.

“That’s just wrong,” Court said. “Just because you have a good job or a good education doesn’t mean you should be paying less for your auto insurance.”

The practice of offering biased pricing based on factors such as race, education and occupation isn’t unique to California — insurers use the practice to some degree, and often in worse ways, in every other state relative to auto insurance and other types such as home insurance, Court said. Insurers, he said, often prefer richer, whiter clients because they feel they make better customers from an economic standpoint.

California’s investigation found that drivers living in zip codes with average income above $49,000 were more than twice as likely to receive discounts as those in neighborhoods with average income of less than $22,500, for example. Some areas of Los Angeles, San Diego and the Bay Area saw participation in group discount programs three to four times higher in high-income neighborhoods.

California’s proposed regulation would amend state law so firms selling auto insurance to so-called “affinity groups” treat customers fairly regardless of sex, race, color, religion, ancestry, national origin, disability, medical condition, genetic information, marital status, sexual orientation, primary language, immigration status, occupation, educational attainment or income level.

For example, insurance companies would have to offer discounted rates to economically and ethnically diverse groups (such as lower-income customers in South Central Los Angeles and wealthier ones in Beverly Hills), Court said. Firms must also prove the groups receiving discounts have a lower risk of insurance losses and claims — in other words, that the discounts are mathematically justified.

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Mark Sektnan, vice president for state affairs for the American Property Casualty Insurance Association, a trade group representing auto insurers, fears the proposed rules will upend group programs that save “millions of hard-working Californians” money on their insurance every month.

“Our concern remains that these proposed changes will eliminate a discount auto insurance program used by millions of Californians struggling to keep up with the ever-increasing high cost of living in California,” Sektan said.

If the California insurance department finalizes the rule as proposed, insurers would have to offer policies complying with the pricing regulation beginning in 2022.