Some state lawmakers are seeking to change the importance of residents’ zip codes in determining the price of their auto insurance, arguing that people of color in urban and low-income areas pay higher rates. But insurance companies say the move would take away one of their only remaining rate-setting tools and could raise insurance payments for everyone.
“Currently in Massachusetts, residents living in urban and diverse communities are forced to pay significantly more than their suburban counterparts for auto insurance,” said Senator Pavel Paiano, who introduced a bill (S 703) that would change the rating formula for give no more than 75 percent weighting to a person’s local area and 25 percent weighting to the national average aimed at mitigating levels in urban areas.
Paiano based Connecticut’s policy formula on territorial rating. A 2006 report by the Connecticut Legislature’s research office stated that “the less territorial experience is accounted for, the lower auto insurance rates in urban areas, but with a corresponding increase in rates in all other areas of the state’.
Testifying on the bill before the Joint Committee on Financial Services on Monday, Paiano said data from the merit rating board showed that communities with the highest percentages of people of color pay an average of 90 percent more than drivers in less diverse cities and towns.
“These gaps persist for both experienced and safe drivers. Experienced drivers in BIPOC communities pay 95 percent more, and experienced drivers with excellent records still pay 80 percent more than those living in majority white communities,” he said. “The disparities were so stark that this report found that experienced drivers with excellent records in urban communities paid 12 percent more than drivers in less diverse communities who had a recent history of accidents or at-fault violations. These prices are not fair or just.
The lawmaker cited a study done in Connecticut that he said showed the 75/25 ratio led to premium drops of as much as 10.6 percent in the city of Hartford, compared to prices when insurance companies weighted rates entirely based on local zip codes as Massachusetts law currently allows. The study showed that premiums in suburban and less diverse cities increased by no more than 3.4 percent as a result of the change, Paiano said.
Payano’s bill isn’t the only legislation aimed at changing insurance premium criteria. The bill by Congressman Gerard Cassidy of Brockton (H 969) seeks to ensure that no insurance company can refuse to issue or renew insurance based on a zip code, geographic area or where a driver garages their vehicle.
Outside of Boston, Brockton had the highest auto insurance rates in the state in 2020, with an average annual premium for Brockton drivers about $900 more than neighboring East Bridgewater, The Brockton Enterprise reported.
“By making insurance more affordable in the state’s lowest-income communities, it will reduce the number of uninsured drivers on the road and create savings for all drivers,” Michael DeLong of the Consumer Federation of America told the committee Monday.
But Christopher Stark, executive director of the Mass Insurance Federation, said territory is one of the “most established and widely used rating variables” for insurance companies.
“There’s a lot to balance in that from road safety and infrastructure investment in some of these areas, but when claims and exposures in certain areas are higher, the rates for those individuals will also be higher,” he said. “If there are good drivers in some of these neighborhoods, that’s one reason why we need to be more open in our underwriting criteria and less restrictive.”
Massachusetts is one of four states, along with Michigan, California and Hawaii, that broadly ban the use of gender, credit score and education level in determining insurance rates, according to quote comparison website The Zebra’s 2022 State of Insurance.
The report also shows that Massachusetts ranks 33rd on the list of the most expensive to least expensive car insurance in the 50 states, with an average annual rate of $1,346 in 2022.
Frank O’Brien, vice president of the American Casualty Insurance Association, also argued that Massachusetts does not allow rating factors that are used “almost everywhere else” to set premiums.
“Urban communities tend to have higher demands. This is a function of congestion. If you’re in an urban community, it’s usually more crowded. And when there’s more congestion, people hit each other and hit each other more often than in areas that are less urban,” O’Brien said. “Passage of this bill will result in suburban communities subsidizing urban communities within the community.” If it’s something you want to do from a public policy perspective, of course, it’s just not something that’s actuarially significant.
After Stark’s testimony, Congressman Stephen Owens disputed his statements.
“So what I’m hearing is the Insurance Federation’s position that it’s actually morally sound and good business practice to discriminate against BIPOC communities,” Owens Stark asked.
“It’s not discriminating against BIPOC communities,” Stark replied.