According to a recent study conducted by a nonprofit consumer advocacy group, the Consumer Federation of America, automotive insurance companies use ZIP code locations to segment customers and determine their insurance rates. The group alleges that this segmentation and targeting practice unfairly penalizes people living in lower-income areas; the insurance industry argues that it is a necessary and reasonable way to predict the chances of an accident.
The study investigated 10 cities and requested quotes from six different insurance companies, using a hypothetical example of a good driver who differed only in residential location. In some cases, widely divergent quotes resulted for people who lived literally across the street from each other but were assigned to different ZIP codes. For example, two addresses in Buffalo, N.Y., prompted quotes of $1697 and $2315, even though they were within shouting distance of each other. Although the variations were different across the cities and insurers, on average, people in ZIP codes in which median incomes were lower and that featured a higher percentage of minority residents paid $410 more annually for their auto insurance.
An insurance industry group calls the findings misleading though, noting that insurers have no choice but to use addresses to determine insurance rates, because the address indicates where the car will be driven most. Such “territorial ratings” can account for factors such as weather, traffic congestion, and road quality. If someone lives in a busy, urban environment that gets heavy snowfall but has insufficient infrastructure to fix potholes, he or she likely should pay more for insurance, because the likelihood of damage to the car is greater.
The auto industry also uses other demographic factors to determine insurance rates, including education levels, home-ownership, and credit ratings. In this sense, using ZIP codes represents just another piece of information, enabling auto insurers to segment their consumer markets more effectively and accurately.
But the Consumer Federation of America suggests that all such uses are inappropriate, because of the potential for discrimination. Poorer people living in areas with poor roads or heavy congestion have little choice but to be penalized. Instead, according to this nonprofit group, insurance rates should be based solely on people’s driving records and accident history, as well as the number of miles they drive each year.
1.Is demographic information a fair and ethical means to segment insurance customers?Why or why not?
2.If you learned that your insurance rates were much higher than your neighbor’s, even though you had similar driving records and habits, how would you respond?
Source: Ann Carrns, “Your Neighbor in an Adjacent ZIP Code May Pay Less for Car Insurance,” The New York Times, October 19, 2018