Unpacking the controversial issue of an ‘ethnicity penalty’ in car insurance premiums

Does the insurance industry discriminate on race when it comes to price? Data from a recent Citizens Advice report would suggest so. 

Insurers, on the other hand, would contend that they do not gather data on race or ethnicity when quoting for premiums. 

That the insurance industry discriminates on the basis of race is certainly a highly controversial conversation and the issue does not seem to be going anywhere. 

Back in March 2022, Citizens Advice sounded the alarm following a year-long investigation that revealed a concerning correlation – according to its research, people of colour (POC) were paying an average of £250 more per year for car insurance than white people, regardless of gender, age and income.

Like a snoozed alarm clock going off a second time, Citizens Advice sounded the alarm again at the end of March this year, reminding the industry of the urgent need to address what it coined the “ethnicity penalty”.

In its most recent report (30 March 2023), Citizens Advice revealed that motor insurance firms were charging POC 40% more than white people on average per year.

It found that this gap was even more significant for black customers, who paid almost 49% more based on data drawn from 18,000 people that had contacted Citizens Advice for help.

The report also highlighted that the postcode a customer resided in had a significant effect on premiums, with areas with higher concentrations of POC being charged higher rates on average.

Insurance Times contacted a number of insurers operating in the UK motor market for this piece – while all of them declined to provide comment, they uniformly specificed that they do not collect data on ethnicity or race.

Alarming rise 

Amercian economist Brian S. Wesbury once said: “Insurance is not just a product, it’s a promise. It’s a promise that we’ll be there when you need us most.”

Wesbury is correct – insurance is a safety net for customers during unexpected and costly events, but its reputation as such relies on the fact that premiums are based on risk, rather than on immutable characteristics such as race. 

So, is the insurance industry being racist? And is that possible if it is not even collecting data on these identifiers when quoting premiums to customers? 

David Mendes da Costa, principal policy manager for consumer policy at Citizens Advice, said: ”We’re not saying that there is direct discrimination or that insurers are collecting ethnicity data and then making decisions on the back of it.”

According to Mendes da Costa, the ethnicity penalty identified by Citizens Advice is the result of “indirect discrimination”, which he defined as a situation whereby ”as a group, one group might face worse outcomes than other groups”. 

Citizens Advice however, said it was not up to the charity to indicate what might be resulting in this indirect discrimination – Mendes da Costa threw this back to insurers. 

He said: ”[Insurers are] the ones in the position to look through their data and work out whether there is additional risk, or additional cost required to provide cover.

”It’s incumbent upon [insurers] to go into this data themselves in order to answer the question so that we can actually start moving the debate.”

A call for accountability

Transparency of data – how it is collected and how it is used – is key in ensuring that the public’s confidence in the sector as a safety net remains strong. 

This is why there’s a growing chorus of voices calling for insurance firms to assess how companies collect and use personal data.

Citizens Advice, for example, has called for greater transparency around how insurers utilise pricing algorithms when determining premiums and asked insurers to publish the data they use when making these decisions. 

However, Catherine Carey, head of strategy at Consumer Intelligence, told Insurance Times that while she supported calls for more transparency between insurers and customers, how data was presented could impact the findings it seemed to show. 

She explained: ”With data, it’s really easy to unintentionally skew the narrative if you cross break by a certain demographic – and obviously, in this case, [that demographic is] race.”

Carey added that insurers make decisions on price “based on factors other than ethnicity”.

“Insurance [firms] doesn’t collect that information – so to present them with the problem [of an ethnicity penalty] and then ask them for solution to that problem is very tricky when they don’t have that information in the first place,” she explained

James Daley, managing director of consumer group Fairer Finance, agreed that there should be more transparency around insurance pricing algorithms and added that insurers should be required to disclose what data they are pricing on.

He said this could help consumers understand how their premiums were calculated and would be an important first step to improving trust, although he believed that real change in the industry would require government intervention.

Daley noted that while insurers may use non-causal data – such as customer’s occupations or their postcodes – to determine premiums, this could potentially lead to discrimination.

He explained that the insurance industry’s pricing model had become “personalised”, raising concerns about unfair pricing for “certain groups of people.”

This trend of ever-increasing data granularity contradicts the very nature of traditional insurance, which pools risk to then share it out between policyholders.

Daley explained that while insurers argue that personalised pricing is the result of their ability to understand risk more precisely, this approach often leads to unfair pricing for customers.

Carey agreed, adding that the insurance sector could change pricing practices to eliminate risk-based pricing, this would raise further questions about unfairness and subsidising of more dangerous risks by those who were less likely to make claims. 

Making heads or tails

Fundamentally, whether personalised pricing practices are moral or not, insurance pricing is currently based on risk data that insurance companies gather when a customer applies for a policy. 

Citizens Advice’s research into the pricing outcomes for POC in the motor insurance market indicates that POC are paying more for cover – so, where these firms don’t collect data on ethnicity, what is causing POC to pay more for their insurance? 

Carey told Insurance Times that she believed the issue of an ethnicity penalty was more like to be explained by the concept of a “poverty premium”. 

In March this year, for example, cross-party thinktank Social Market Foundation released a report explaining that people on lower incomes were paying up to £300 more for their motor insurance compared to wealthier drivers simply because of their postcodes. 

And, in October 2022, charity the Runnymede Trust released the results of its research showing that while minority ethnic people made up 15% of the UK population, they accounted for 26% of those experiencing deep poverty.

Carey added: ”[The problem of increased premiums] is not specific to race, although it disproportionately affects people from minority ethnic backgrounds due to wider social issues.

Daley agreed that POC paying higher premiums was primarily about income, rather than race, and could not be attributed solely to racism. 

He explained that arguing that higher insurance premiums resulted from an ethnicity penalty “narrows the focus of a broader problem of societal differences”, adding that the issue could not be “unpicked without a political and social debate” to determine what is acceptable in the insurance industry. 

Despite this, Mendes da Costa told Insurance Times: “Leaping to the conclusion that something is [reliant on] social change that can only be made by the government presumes that there isn’t something that’s just going wrong within pricing.”

The Citizens Advice spokesperson added that its data suggested that the ethnicity penalty was distinct from – and charged in addition to – a poverty premium.

Righteous regulation

What is clear is that the insurance industry must be able to explain the discrepancy in pricing between white people and POC to retain trust.

Extra transparency could represent a useful first step here, but Daley indicated that he believed outside intervention would be needed to properly address the issue.

When it released its data in March this year, Citizens Advice questioned the FCA’s position and accused the regulator of failing to act a year on from when it released its first report on an ethnicity penalty in 2022. 

The charity said it felt that the issue was still not a “priority on the list” within the insurance sector.

Mendes da Costa added that he believed the FCA should take action to monitor outcomes and intervene if differences in pricing between different ethnic groups could not be justified.

Speaking to Insurance Times, an FCA spokesperson said: “People of colour should be treated fairly in the provision of insurance.

“The FCA welcomes the work Citizens Advice has done by investigating this issue and has worked closely with them to understand the issues raised.”

Citizens Advice, meanwhile, said it would continue to monitor the issue and added that it hoped it would not have to call on the sector to address it for a third time.

However, with no agreement on what the issues actually are between different stakeholders, it seems likely the charity will be producing a third report.

Increased transparency seems a solid solution to the problem of an ethnicity penalty, because while the insurance industry must continue to be allowed to price its own premiums based on risk, it must also clearly demonstrate to POC customers that they are not being discriminated against because of their race. 

Like a choir, stakeholders must come together and harmonise their efforts to find a solution that rings true for all.