Citizens Advice sounds alarm on car insurance 'ethnicity penalty'

The practice, Citizens Advice said, was uncovered as part of a year-long investigation into 18,000 car insurance costs reported by people who came to the service for debt help in 2021.

To support these findings, the organisation also carried out 649 mystery shops using six personas across eight postcodes. The majority of personal details submitted online, including car, job, and no claims history remained the same, it said.

In postcodes where over 50% of the population were from ethnic minority backgrounds, the organisation said it found an ‘ethnicity penalty’ of at least £280 a year. It added that this was higher in areas with greater ethnic minority populations.

The organisation said it has “stress-tested” the postcode findings and found that common risk factors of crime rate, deprivation, road traffic accidents and population density, could not account for the difference in price.

The average quote in a low-crime area where most of the population were from ethnic minority backgrounds was more than double that in a largely white area with a much higher crime rate, Citizens Advice highlighted.

Citizens Advice acknowledged that everyone who lives in these postcodes pays the higher prices regardless of ethnicity.

However, it added that “if this trend were to be replicated across the country, people of colour would be 13 times more likely to be paying it than white people”.

The organisation said this means that people from ethnic minority backgrounds could be paying at least £213m a year more on their car insurance, and therefore labelled the practice an “ethnicity penalty”.

It is now calling on the Financial Conduct Authority to ensure no one pays an ethnicity penalty in the insurance market.

Prior warnings

In 2018, the FCA warned insurers that using data linked to protected characteristics could discriminate against consumers.

This is not the first time an alleged ethnicity penalty has been flagged. In 2016, a report commissioned by Thompsons Solicitors used data from the AA to find that people who live in multi-ethnic districts pay higher-than-average premiums of up to £458.

The findings were dismissed by the Association of British Insurers at the time for using “flawed statistical analysis”.

Thompsons Solicitors submitted its findings to the Equality and Human Rights Commission in December 2016 after claiming that “the government indicated it would not take action on the issue”.

While insurers do not collect ethnicity data, Citizens Advice said it “fears the volume of data now available means there is a real risk that other data can be used as a proxy for the ethnicity of customers”.

It said: “This data is processed through complex algorithms which are hard to examine, making it difficult to track if some groups are paying more than others. This could be leading to the ethnicity penalty discovered through this research.”

It further called on the FCA to set out how insurance firms must prove they abide by the Equality Act (2010) and require firms to audit and account for their pricing decisions. The regulator should also take enforcement actions where firms cannot explain ethnicity pricing differences, Citizens Advice set out.

Dame Clare Moriarty, CEO of Citizens Advice, said: “For too long the impenetrable nature of insurance pricing has just been accepted, but a £280-a-year ethnicity penalty cannot be allowed to continue.

“It is time for the FCA to lift the bonnet on insurance firms’ pricing decisions and ensure no one is paying more because of protected characteristics like race.

“The use of algorithms has real-world implications for real people. They must be applied with caution, under the careful scrutiny of regulators.”

Pricing practices

An FCA spokesperson responded: “We welcome Citizens Advice’s work on this important issue. Its analysis highlights a risk of discrimination based on race and raises some potentially challenging questions for insurers.

“Firms must not use data in their pricing that could lead to discrimination based on protected characteristics, such as ethnicity and we have acted where we’ve had concerns, including writing to all insurers setting out our expectations.

“Firms must also be able to assure themselves, and us, that any risk factors they include also do not result in discrimination. We will continue to consider any evidence we receive of concerns around pricing.”

James Dalton, director of general insurance policy at the ABI, added: “Insurers never use ethnicity as a factor when setting prices and our members comply with the Equality Act. All other rating factors being the same, two people of different ethnicities who live in the same postcode will pay the same premium for their car insurance.

“Insurance is priced on individual risk levels and there are many different risk related factors that are used to calculate the price of a car insurance policy which, as Citizens Advice recognise, should not be looked at in isolation but ethnicity is not one of them. As the report says, the research ‘was exploratory, and therefore cannot definitively identify what is driving this trend.’

“However, we recognise this report raises an important public policy debate. Like everyone, our sector has a role to play in addressing inequalities that exist in wider society and it’s an issue that we will continue to engage on constructively as an industry.”

Loyalty penalty

Citizens Advice previously campaigned to ban loyalty penalties for insurance companies, which ultimately led to new FCA rules going into force at the start of this year.

The investigation into dual pricing started in 2018 and in September 2020 the FCA found that six million customers were paying £1.2bn too much for their cover.

The new rules mean that when a firm offers a renewal price to a consumer it can be no more than the price the firm would offer a new customer. The measures have been touted as intending to save customers £3.7bn over the next 10 years.

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