coverage or raise premiums for individuals who exhibit certain risk factors, but they are not allowed to engage in unfair discrimination by using risk classification factors based on race, national origin, sex, or religion.
Your driving record, age, and zip code are legal reasons to raise your premium.
Racial discrimination is illegal under insurance law.
Some states forbid the use of credit scores to set insurance rates.
Ethical risk-based insurance discrimination
In a way, insurance providers are allowed to discriminate. However, they can only look at risk factors that:
Impact everybody equally
Are directly related to car insurance
Auto insurance companies may look at your driving record, experience, and more to assess your risk and
Location by zip code (looking at factors like property crime, population density, and weather patterns)
Gender marker on your driver's license
Marital status
Credit score
How they set rates: Insurance companies tend to use statistics to determine how these factors relate to risk. Providers are allowed to set higher premiums or deny coverage for policyholders who fall into the
category since they are essentially taking on the financial risk of the driver that they are insuring.
For example, young drivers between the age of 16 and 19 are three times more likely to be involved in a fatal crash than drivers over 20, so it makes sense that they’re given higher rates based on age and experience.
A history of unethical discrimination in insurance
Unfortunately, the insurance industry has a less-than-perfect history when it comes to discrimination in underwriting practices.
While the National Association of Insurance Commissioners (NAIC) continues to advocate for state laws that prohibit subjective discriminatory practices in insurance underwriting, many of the risk factors used in objective insurance practices may indirectly perpetuate limited accessibility for systemically marginalized peoples.
Statistic-based risks associated with gender perpetuate negative stereotypes and enforce transphobic, binary practices. Low credit score risk is more likely to target people of color who have been historically oppressed by wealth-based policies.
As such, several state insurance regulators have taken steps to ban the use of gender markers and credit scores in risk assessments for insurance premiums, from homeowners insurance to car insurance.
Massachusetts forbids the consideration of gender and credit score when determining car insurance rates. In New York, Michigan, and Maryland, the consideration of credit scores is considered a legal form of discrimination.
Unfair insurance discrimination
Federal law prohibits underwriting guidelines from using unfair discrimination that targets certain protected classes.
The following factors are prohibited from being used to set car insurance rates or deny coverage:
National origin
Race
Skin color and other physical attributes
Sexual identity/orientation
Religious affiliation
Medical condition
Physical or mental disability
Additionally, some of those controversial factors that can be used to set rates are not allowed to be used to deny coverage, including sex or gender (as it appears on your license and marital status.
Not done yet: Even with these prohibitions in place, the automobile insurance industry still has a ways to go to make sure everyone has equal access to insurance coverage—as do life insurance companies and health insurance companies. Subtle forms of insurance discrimination continue to permeate these industries, stemming from a long history of national inequality.
Next steps in removing unfair discrimination
Areas to improve: According to key advocates in the industry, there are three keys to eliminating insurance discrimination.
Remove racial proxies (like income level and credit scores) that exist in big data
Increase diversity, equity, and inclusion (DEI) efforts in the industry
Educate consumers on insurance discrimination
What’s being done: The last few years have seen notable steps taken at the state and federal levels to address subtler forms of insurance discrimination.
2019: Two legislators introduced bills that sought to limit the use of credit scores and income proxies in insurance pricing. Both bills were stalled in 2021, but some states have since passed laws that restrict the ability of insurance companies to use credit scores.
2020: The National Agency of Insurance Commissioners put together a special committee to address the intersection of race and modern insurance practices.
2021: Colorado passed a bill that requires insurance underwriters to provide evidence that their algorithms and data usage do not perpetuate discrimination based on certain classes, like race, gender identity, sex, and sexual orientation.
What you can do: If you’re passionate about eliminating insurance discrimination, you can act by:
Contacting your local legislators
Engaging in discourse with members of your community
Asking about your provider’s underwriting practices.
Don’t be scared to shop around for a new policy if you don’t like the way that your insurance company sets its rates!