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Pedro Montenegro has an impeccable driving record.
But even though Montenegro said he has never had a car accident or been issued a parking ticket for a relocation violation, he has never qualified for affordable car insurance in his adult life. This is something that Montenegro, 30, who makes a “good living” as a public relations agent in Washington, DC, says it’s inextricably linked to his bad credit rating, which is a low 500.
Most recently, he received several monthly premium offers of around $ 350 for minimal coverage on a modest used car – a number he cannot afford.
Montenegro, who is a Guatemalan American, is facing the same battle faced by millions of drivers across the country who have excellent driving performance but pay higher premiums for having poor credit or no credit history. These two factors are far more common among color consumers. As a result, economists, consumer advocates, state and U.S. lawmakers, and even some regulators, say such practices are a tremendous example of systemic economic racism, where black and Latin American consumers pay higher premiums even if they pose less of a risk on the road.
“When insurance companies rely on people’s credit histories, they perpetuate the systemic prejudices that have plagued our society for generations,” said Doug Heller, insurance expert at the Consumer Federation of America, a nonprofit advocacy group. Heller added that it was “uniquely wrong” that in all but two states drivers are required by law to purchase auto insurance, but the government does not adequately regulate pricing.
Rep. Rashida Tlaib, D-Mich., Has introduced laws that would end the practice in successive Congresses. “Someone who has not had access to banking or credit and is a good driver shouldn’t pay more than someone with multiple DUIs who has access to financial stability,” she said.
After realizing this discrepancy and the lack of federal action, a growing number of states are trying to ban auto insurance providers’ reliance on credit-based pricing. Some insurance companies have taken steps in states where this is possible to rely solely on driving behavior when determining premiums.
“It is part of this critical element of economic opportunity in society where prohibitively high tariffs can prevent you from getting to and from your workplace or getting your children where they need to be,” said Heller.
“Modern redlining”
Reliance on credit-based pricing naturally harms consumers of paint, say consumer experts and economists, simply because of the fact that people with paint are much more likely to have poor credit or no credit at all. According to a 2019 study by the Urban Institute, a left-wing social policy think tank, more than half of white households in the US had an FICO credit score of over 700, compared with just 21 percent of black households.
Another 33 percent of black households with credit history had poor credit and no credit, the study found, compared with just 18 percent of white households who had no credit. Studies show that the numbers are similar in Hispanic households.
With almost every auto insurer relying heavily on credit checks in various proprietary formulas to determine prices, people of color are paying disproportionately more for auto insurance, experts said, with extensive research to back it up.
Studies by the Consumer Federation have shown, for example, that in zip codes with predominantly black residents, the consumer premiums are 60 percent higher than in predominantly white zip codes. That difference can amount to as much as $ 3,300 per year in annual premiums, according to Consumer Reports research.
“Calling this modern redlining is accurate,” said Darrick Hamilton, professor of economics and urban policy at the New School for Social Research.
Insurance companies weight different information in price rates. This usually includes not only the credit history, but also the age, type and scope of the coverage requested, how much and how often you drive, and a wealth of personal information such as gender, marital status, medical history, smoking status, education, job and zip code.
It is illegal to ask about the breed. In almost all states, regulators explicitly state what can and cannot be checked for pricing.
Insurance companies have routinely defended their credit formulas. They say it’s part of a broader, risk-based methodology that allows consumers to pay less overall. These groups say that better credit is correlated with less damage and accidents.
But even many in the industry have realized over the past 18 months that it may be time to make a change. Last year, the National Association of Insurance Commissioners, an industry regulator, hired a committee to investigate whether certain underwriting practices were discriminatory. The Race and Insurance Committee, formed in July 2020 following the assassination of George Floyd, will meet this month to discuss what progress they have made.
States take the lead
The issue has caught the attention of state lawmakers. As recently as this year, proposals were made in Colorado, New Jersey, New York, and Oregon banning the use of credit-based pricing in the auto insurance industry.
“I just don’t understand why your credit score makes you better or worse as a driver,” said New York State Senator, Democrat Kevin Parker, who sponsored the bill for Black or Latino in our state, period. “
These states would join California, Hawaii, and Massachusetts if their proposals were implemented, all of which banned this practice years ago.
In Washington state, the agency that oversees the insurance industry banned the practice through emergency action by the executive branch for three years this year after a draft law stalled in the legislature to do so.
“The argument by insurance companies that a credit rating somehow reflects their ability to keep prices down is absurd,” said Mike Kreidler, Washington Insurance Commissioner, longtime credit critic and former Democratic Congressman, in an interview. “Insurance companies will run you off really fast if you stop paying your premiums.”
Movement also takes place in the corporate world. Root Inc., a listed motor insurance company, was founded in 2015 as the first motor insurer to exclusively use driving behavior as a basis for determining the insurance price. The company, which relies on a smartphone app that tracks a user’s driving, offers a no-credit procedure based on specific state regulations in states where it can, and has recently committed to being part of the expansion effort to be in all 50 states by 2025. While this option is advertised as being fairer, it has raised other concerns about accuracy and, most importantly, user privacy, as the technology is essentially constantly monitoring a user’s movement.
Root CEO Alex Timm said in an interview that driving ability is by far “the most predictive variable” of whether someone should be expensive to insure.
“It’s causal,” he said. “The rest is correlative.”
A handful of other tech companies are paving the way to offer similar products, including an auto insurance app called Loop that promises “mission-driven auto insurance powered by AI and powered by social good.”
On the DC radar
Progress at the federal level has been less robust, but a conversation is ongoing.
President Joe Biden has indicated repeatedly over the past few months that his administration is keen to address the issue. Speaking at a town hall in February, Biden said, “If you want to go ahead and get insurance and find yourself in a black neighborhood, you will pay more for the same insurance that I pay for the exact numbers same home.”
“Your car, you have never had an accident in your car. If you live in a black neighborhood, you pay a higher premium for your car, â€he said. The White House did not respond when asked if any action is planned to resolve the problem.
However, the legislature in Congress has made proposals. Senator Cory Booker, DN.J., tabled a bill last fall that would ban the use of credit ratings and other measures that are seen as discriminatory in auto insurance pricing, as did Tlaib in the House of Representatives, though none the bills were brought forward.
Meanwhile, Montenegro has relied on restricted public transport and sometimes rental cars to get around due to the pandemic.
But he said he was hopeful about the national discussion on economic racism and the movement he saw in the government and corporate sectors.
“You think, and maybe it is naive, that this is something that happened to past generations and people of color decades ago. Not for you, â€he said. “But the truth is, even now it mostly affects people of color, and it’s so important that we do something about it.”
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