Study Alleges Racial Bias in Auto Rates

Reopening a long-standing debate, a study released Monday alleged that California auto insurers charged good drivers living in primarily African American and Latino neighborhoods sharply higher premiums than those paid by drivers in white neighborhoods.

The study, by Consumers Union in San Francisco, was immediately criticized as flawed by insurance companies. Its release comes just weeks before state Insurance Commissioner John Garamendi is expected to unveil a proposed revamp of insurance rate-setting rules.

The study matched auto rates charged by Allstate Corp., Farmers Insurance Group of Cos. and State Farm Mutual Automobile Insurance Co. -- the state’s three largest insurers -- with census data on the ethnic makeup of more than 500 ZIP Codes throughout the state.

Consumers Union said it checked annual premiums in each ZIP Code for a female with 22 years of driving experience and no tickets or accidents. The data were from 2002 for Allstate and Farmers, and from 2002 and 2004 for State Farm.

The report found that the sample driver in a primarily Latino ZIP Code would pay 13% more, on average, than the same driver in a primarily white area. In a primarily African American ZIP Code, that driver would pay 60% more than the driver in the white neighborhood, Consumers Union said.

“Insurers are penalizing African Americans and Latinos with good driving records by charging them higher rates just because of their ZIP Code,” said Mark Savage, senior attorney with Consumers Union. “Voters thought they were stopping this practice 17 years ago when they passed Proposition 103.”

Allstate spokesman Rich Halberg said the study’s conclusions were “inexplicable and baseless.”

“Consumers can see for themselves by going to the Department of Insurance’s website and plugging in data,” Halberg said. “Their findings just don’t wash on so many levels.”

A State Farm spokesman also disputed the findings. And at Farmers Insurance, spokesman Jeff Beyer said the company wasn’t given a copy of the study, but he suspected the data were selectively culled.

“Race has absolutely no place in insurance rating or underwriting decisions. It is not data that we capture,” Beyer said.

Auto insurance rates are affected by a driver’s neighborhood, insurers acknowledge. But that’s mainly because there are more accidents in urban areas and because medical claims, as well as the number and severity of car thefts, can vary by region, Beyer said.

Determining rates based on costs that vary from one region to the next is a far cry from setting rates based on race, he said.

Consumers will be hearing more about the issue in coming weeks, as state insurance regulators prepare to release proposed rules on rate setting. Norman Williams, a spokesman for Garamendi, said the rules were expected out within two weeks.

Consumers Union and the Foundation for Taxpayer and Consumer Rights, which sponsored Proposition 103, want Garamendi to revamp the rules so that ZIP Codes will have less weight in rate formulas.

Proposition 103, passed in 1988, mandated that auto insurance rates be based primarily on driving record, miles driven and experience behind the wheel.

But subsequent court rulings have given the state insurance commissioner wide discretion over the rating criteria he or she can accept. Generally, it’s legal to set rates based on anything the insurer can prove has a significant effect on costs.

“The challenge before John Garamendi is whether to end the lingering racism in our auto insurance system or let it linger for another decade,” said Doug Heller, executive director of the Foundation for Taxpayer and Consumer Rights.

Said Farmers’ Beyer: “We look forward to meeting with Garamendi soon. If he has a plan that he thinks could reduce auto insurance rates, we’d be very happy to talk about it.”