Exploring the ethnicity penalty in insurance

The insurance industry has been accused once again of discriminating against individuals living in ethnically diverse areas. 

Recent research by BBC Verify found car insurance quotes were a third more expensive in some areas of England with the biggest minority ethnicity populations after it collected thousands of quotes based on identical driver information, but with different addresses.

It chose 6,000 addresses from a spread of more and less wealthy and diverse areas, selecting 20 in the most deprived and 20 in the least deprived for each English local authority.

Quotes for a 30-year-old teacher driving a Ford Fiesta averaged £1,975 if they lived in the Princes End area of Sandwell, near Birmingham, but in the nearby Great Bridge area, the average was £2,796. 

The two areas have similar scores for road accidents and crime, according to a government measure called the Index of Multiple Deprivation, but Great Bridge has a larger black, Asian and ethnic minority population.

However, Jonathan Fong, general insurance policy manager at the Association of British Insurers, insists that insurers, including car and home, are not allowed to use ethnicity as a factor when setting prices under the Equality Act 2010.

If 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 insurance.

He says: “Insurers consider a wide range of risk-related factors when calculating the price of a car insurance policy. These will commonly include age, driver experience and type of vehicle. 

“The claims history of an area where someone lives and does most of their driving will also be a key aspect that insurers will consider. Beyond accident and crime rates, several factors including road type, traffic system designs, traffic density, types of vehicles in the area and local repair prices will contribute to the cost and severity of claims.”

This was echoed by Direct Line, which sells car and home insurance, and says it does not discriminate based on a person’s ethnicity and if there is a difference in price, it is down to “a range of risk characteristics”.

A Direct Line spokesperson adds: “We do not discriminate on the basis of someone’s race and do not set pricing on the basis of a customer’s ethnicity. We do not ask for and do not collect any ethnicity data from our customers, so the ethnicity of a customer cannot impact on the price that is offered for an insurance policy, in line with the Equality Act 2010. 

Our pricing is guided by a range of risk characteristics, which include many factors that are specific to individuals, post codes and their addresses. Because of this, price differences do occur from one post code to another.

Direct Line

“Two people of different ethnicities, or of different names possibly suggesting different ethnic backgrounds, with the same postcode, and with identical risk profiles, would pay the same price. 

“Our pricing is guided by a range of risk characteristics, which include many factors that are specific to individuals, post codes and their addresses. Because of this, price differences do occur from one post code to another.”

So how can motor and home insurance policies cost more in ethnically diverse areas?

Postcode penalty

BBC Verify says the postcodes for its mystery shopping exercise were different but all other details such as the driver’s age, job, driving history and car model were kept the same.

It states that crime and road accident levels, both of which are known to affect insurance premiums, were also taken into account.

But insurers say the claims history of an area is a key factor that insurers will look at, beyond accident and crime rates, to get a historical picture of the number and severity of claims. 

A lot of factors can influence the historical claims trends including road type, traffic system designs, traffic density, and types of vehicles in an area, as well as proximity and availability of first responders and the number of uninsured drivers.

Repair costs may also differ from one area to another, and these are typically more expensive in urban areas.

The BBC Verify analysis also looked at car insurance quotes, rather than premiums paid, and insurers argue that mystery shopping exercises are not always a reliable means to test insurance because inputting mystery quotes can activate an insurer’s anti-fraud detection processes, which may affect the pricing that people receive.

If the BBC investigation used names and addresses of real people, then some more sophisticated insurers might check third party data sources to compare the data input for a quote by verifying address against the electoral roll or Experian. 

But if these personas don’t exist at all, or conflict with the data held on real world addresses or people, then this could look like fraud and attract a higher premium to deter the customer.

However, if the BBC Verify investigation used the same personal details, but only changed the conditions, then this might also flag up on an insurers pricing system as something suspicious and consequently result in an increased quote.

Repeated questions

The BBC Verify investigation is not the first time questions have been raised around how the insurance industry prices policies. 

Damning research by Citizens Advice in 2023 also outlined how people of colour are still on average paying £250 more than white people for car insurance. 

Citizens Advice’s report, titled Discriminatory pricing: Exploring the ‘ethnicity penalty’ in the insurance market, warned the combination of the ethnicity penalty on top of a poverty premium is leaving people of colour with less money in their pocket at a time when bills are skyrocketing. 

Kayley Hignell, interim director of policy at Citizens Advice, says: “Our research in 2023, uncovered that people of colour were being charged on average 40% more than white people for their car insurance – to the tune of £250 each year. This ethnicity penalty is deeply alarming.

“What’s more, we’ve found that over one million people cancelled their car insurance last year due to pressures from rising bills. Worryingly, people of colour were three times more likely to do so than white people. This only makes the case for action on the ethnicity penalty more urgent.”

Regulatory action

At the time of the investigation, Citizens Advice urged the Financial Conduct Authority to start monitoring insurance pricing across ethnicity themselves and hold the firms that aren’t taking action against this difference in pricing to account. 

Since then, the FCA has written to insurers warning that more action must be taken to ensure good consumer outcomes.

In letters sent to all insurance firms in September 2023, the regulator also reminded them of its expectations to make sure they’re checking their products are providing fair value to their customers.

But what steps is the insurance industry taking to ensure any past bias is not baked into modern underwriting systems, that may utilise artificial intelligence reliant on past data?

In February, the ABI published AI Guide – Practical ideas for getting started with responsible AI. The extensive 26-page document helps firms understand the questions they need to ask themselves to make sure AI is being used responsibly, consider what they need to do to mitigate the risks of potential bias or exclusion and recognise examples of good practice from use across the sector.

However, Duncan Minty, independent ethics consultant and chartered insurance practitioner, says the fact the BBC Verify team invested time and money in exploring insurance pricing says something about the scale of the problem that is growing for both the sector and the regulator. 

He warns the FCA has not done enough to address concerns. 

Commenting on this issue on his online blog Ethics and Insurance, Minty adds: “Discriminatory pricing is of course a complex issue, but it looks very much like the regulator has not grasped the issue firmly enough. 

“Remember that Citizens Advice’s recommendations in its ethnicity penalty reports were aimed just as much at the regulator as at insurers. And the BBC Verify news report does pretty much the same.

“What we shall soon see then is the FCA facing some pretty hard grilling from the Treasury select committee. The last time discriminatory pricing was looked at by the committee, the then interim CEO of the FCA said that they had the resources and expertise to get inside their models. 

“It was a bullish promise that has not been delivered upon. I doubt if next time round, the regulator will be quite so punchy in its reassurances.”

Not a factor

Following BBC Verify’s mystery shopping exercise, the ABI recognises the insurance industry must do a better job of demonstrating racism is not a factor in pricing.

Fong says: “Insurers do not, and cannot, use ethnicity as a factor when setting prices and our members comply with the Equality Act 2010. 

“However, we recognise that these and other similar findings raise an important public policy debate. Our sector has a role to play in addressing how wider societal issues might impact on insurance costs and it’s an issue that we will continue to engage on constructively as an industry.”