The California Department of Insurance has launched an investigation into whether eight auto insurers in the state discriminate against drivers in minority neighborhoods.

The investigation was prompted by an April 5 article, co-published by ProPublica and Consumer Reports, which found that the eight California insurers were charging more for auto premiums in minority neighborhoods, on average, than in non-minority areas with similar accident costs. California law prohibits insurers from charging rates that are excessive or unfairly discriminatory.

“We have taken these pricing allegations very seriously,” deputy commissioner Ken Allen wrote on April 28 to an attorney at Consumers Union, the policy and mobilization arm of Consumer Reports. “To investigate this contention, all necessary information to complete a thorough analysis on a file-by-file basis has already been or will be obtained from the eight insurers. The Department’s analysis will determine if there are inequities with respect to the pricing and treatment of any ZIP codes by these insurers.”

At the time our article was published, the California insurance department disputed ProPublica’s analysis. “The study’s flawed methodology results in a flawed conclusion,” the regulatory agency said in a statement.

But after hearing from groups including Consumers Union, Public Advocates, and Consumer Watchdog, the department decided to initiate its own investigation. It will make the results of the review public, Allen told Consumers Union.

It’s not clear what data and methodology the department will use in its review, or whether it has the necessary data in-house. Allen wrote that the department will ask the eight insurers to submit “filings of their auto class plans and rating methodologies for review of discriminatory rating practices,” but the department regularly collects much of this information anyway.

The eight companies under scrutiny are subsidiaries of three major national insurers: Nationwide, USAA, and Liberty Mutual.

Liberty Mutual and Nationwide both said that they don’t discriminate, and that they cooperate with any review by the California insurance department.

“We support and embrace an inclusive environment that is free from discrimination in the workplace and in our businesses,” said Liberty Mutual spokesman John Cusolito. “ . . . We are committed to offering drivers fair and competitive priced car insurance coverage options.”

“Nationwide develops its rates based on sound actuarial principles, relying on loss and expense experience and utilizing permissible and nondiscriminatory rating factors in compliance with each state’s ratemaking laws,” said Nationwide spokesman Eric Hardgrove.

USAA did not respond to a request for comment.

“We sincerely hope the California Department of Insurance will reaffirm what they had originally referred to as ‘flawed methodology’ that led to ‘a flawed conclusion,’” said James Lynch, chief actuary of the Insurance Information Institute, an industry trade group.

Lynch said the institute hired an actuarial firm that has reviewed ProPublica’s data. That study has not been made public.

In California, which is a highly regulated insurance market, eight of the 21 insurers we examined had pricing disparities of more than 10 percent, led by Liberty Mutual. Its premiums were on average 33 percent higher in ZIP codes where most residents are minorities than in whiter neighborhoods with similar accident costs. The disparities at USAA and Nationwide were 18 percent and 14 percent, respectively.

Disparate pricing was more prevalent in three other states, where insurance is less regulated.

In Illinois, 33 of the 34 companies we analyzed were charging at least 10 percent more, on average, for the same safe driver in ZIP codes where most residents are minorities than in other comparably risky ZIP codes. In Missouri and Texas, at least half of the insurers we studied charged higher premiums for a safe driver in high-risk minority communities than in comparably risky non-minority communities.

We could examine insurance payouts in only four states because they are the only ones that release the type of data needed to compare insurance payouts by geography.

As a result of our reporting, two Illinois lawmakers have proposed barring car insurers there from using a driver’s ZIP code to determine premiums. Six Democratic members of Congress have also urged the Treasury Department to appoint a director for the Federal Insurance Office, which monitors insurance pricing and availability in minority neighborhoods.

Richard Marcantonio, managing attorney for San Francisco-based Public Advocates, said the California regulator’s actions may not go far enough. “We don’t know exactly what information he has asked for,” he said. “The whole thing is happening in a black box.”

He said that the department’s investigation should be conducted publicly, and the data used for its analysis should also be made available to the public. “It’s just too important an issue to have the public see conclusions without having any basis for understanding what went into them,” Marcantonio said.

Allen assured Consumers Union that this investigation is only the beginning. “The Department will continue this focus on ZIP code treatment in all subsequent class plan filings made by any insurer,” he wrote.


CR's Take

"In California, the law requires that auto insurance rates be based mostly on how well people drive, not on where they live. It's fundamentally unfair to charge good drivers more because they live in minority communities," says Elisa Odabashian, director of Consumers Union's West Coast Office.