Dirty Little Secrets: How Companies Really Price Car Insurance

Most people assume that their car insurance rates are based on how many accidents or speeding tickets they've had, or other factors such as age and gender. After all, we know that men are charged more than women, and teenagers are charged the highest rates of all age groups.

But would you be surprised to learn that your high insurance rates may be due to your race?

Researchers from a study by Consumer Reports analyzed 2 billion insurance quotes at 700 companies and discovered that insurance companies are "less likely to assess motorists based on their driving habits, and more likely to do so based on their socioeconomic status."

Your socioeconomic status is a measure of your work experience and income, or your family's economic and social status, in relation to others around you. Your education level, occupation, and credit scores are all compared to what others in your area have achieved. Consider it a way for insurance companies to learn how well you're keeping up with the Joneses.

While these factors help insurance companies assess how risky you are to cover, they also unfairly penalize low-income and minority drivers who don't have the same opportunities to be competitive.

This means that insurance companies can charge you more because you have a low credit score or less formal education than your friend, even if you have the better driving record.

These are just a few of the factors that go into calculating your car insurance rate. You may be surprised by the others.

Factors that Affect Your Car Insurance Rates

actuary counting

How do insurance companies calculate the premium rate they charge you?

They determine how likely you are to cost them money.

Insurance companies have algorithms to assess everything from how likely you are to be in an accident to the likelihood of your car being stolen, both of which they'd have to pay for if they insured you.

Let's use an example to make this easier to understand.

If you know that cars parked at the corner of Maple Street and Cherry Lane usually get vandalized, you probably won't leave your car there overnight.

When the insurance companies see that you live near Maple and Cherry, they're going to determine that there's an X% chance that you'll have to park on spray paint alley at some point, and you may have your car vandalized. If this percentage is high enough, your rates will be raised to account for the claim you may have to file if the statistics prove correct.

Most insurance companies look at several factors to determine how much you need to pay for coverage. They also claim that certain lifestyle factors can predict poor driving behavior.

But most equality advocates argue that these factors are merely being used to keep minority and low-income drivers on the hook for high car insurance premiums.

So if you happen to fit the demographics that cause insurance companies to raise red flags, your rates will keep rising - no matter how safe your driving is.

Are these factors biased? See for yourself. Here are a few of the most common considerations insurance companies use to calculate your rates:

Marital Status

higher premium for unmarried adults

Research shows that the number of unmarried American adults over the age of 25 is at a record high.

In 1960, only 9% of American adults over 25 were unmarried (1-in-10). But in 2012, that number increased to 1-in-5, or close to 42 million people.

According to researchers, "This trend cuts across all the key racial and ethnic groups but has been more pronounced among blacks."

In 2010, 48.8% of black men and 45.2% of black women reported being "never married" to the U.S. Census Bureau. In 2012, 36% of blacks over 25 had never been married, a number which is up significantly from 9% in 1960.

Why does this matter for car insurance rates?

Drivers who have never been married often pay higher premiums than those who are married.

As DMV.org points out, when a study was conducted in 2004 by the National Institutes of Health, it was discovered that "drivers who have never been married had twice the risk of driver injury than drivers who were married."

You can see why insurance companies favor married couples and penalize single drivers with higher rates. They even offer married drivers more discounts after they merge policies and start bundling together. These are discounts single drivers don't have access to.

So should you get married for the break on car insurance rates?

Probably not. But one reason for delaying marriage does have to do with financial stability.

The U.S. Census Bureau states that between 2007 - 2011, over 20% of Blacks, Hispanics, and American Indian/Alaska Natives lived below the poverty line, almost more than double the percentage of Whites and Asians.

Many low-income households require assistance from the state or federal government to help with everyday expenses. Their eligibility for these programs is based on their income.

If your income is below the federal poverty line, you may qualify for:

  • Medicaid
  • Food stamps
  • Welfare
  • Temporary Assistance for Needy Families (TANF)
  • HUD subsidized housing

However, when you get married and merge households, your combined income as a family may kick you out of some of these programs because one or both spouses earns too much to qualify for help.

As many families learn, it can be a struggle to pay for these necessities without assistance. Marriage is often delayed or put off completely in low-income areas to keep these benefits from expiring.

Let's take a deeper look at how income affects your car insurance rate despite the fact that it's not supposed to be used as a determining factor.

Education and Occupation (aka Your Income)

Even though all states in the U.S. - except New Hampshire - require drivers to obtain at least some liability insurance in case of damages from a car accident, there's no financial help for families in low and middle-class homes to offset these expenses.

What's even worse is that if the insurance company doesn't think you'll be able to pay your premiums, they can deem you 'high risk' and charge you steeper rates than someone they know has the money to pay them on time.

"Legally, insurance companies cannot consider income, race or religion in determining premiums,"Andy Morrison, a consumer advocate at the New York Public Interest Research Group (NYPIRG), said to the New York Times.

But what they can use is your occupation and education level.

Stay In School If You Want Low Car Insurance Rates

graduates pay less

NYPIRG's study revealed that "auto insurers charge higher rates to drivers with less education and nonprofessional, nonmanagerial jobs."

This means a driver with a bachelor's degree will be paying more for insurance premiums than someone with a master's, regardless of if that driver gets into more accidents and files more claims.

According to the Consumer Federation of America (CFA) via MarketWatch:

"A Geico [car insurance] policy for a factory worker in Seattle with a high-school diploma versus a college-educated plant supervisor in the same city cost 45% more ($870 versus $599)."

Not only is using education as a major predictor of risk unfair to drivers with clean records, it also prices several races out of low-cost auto insurance unjustly.

Think about this: In 2008, about 29% of U.S. adults over the age of 25 had at least a bachelor's degree. Figures from the U.S. Department of Education's National Center for Education Statistics that were compiled in 2012 show that:

Between the 2009 - 2010 school year, the breakdown of bachelor's degree recipients was:

who got degrees

  • Whites - 72.9%
  • Blacks - 10.3%
  • Hispanics - 8.8%
  • Asian/Pacific Islanders - 7.3%
  • American Indians/Alaska Natives - 0.8%

As you can see, more bachelor's degrees went to white students than any other race.

With the rising costs of college tuition, college is out of reach for most low-income families.

According to the National Poverty Center:

"Poverty rates for Blacks and Hispanics greatly exceed the national average. In 2010, 27.4 percent of Blacks and 26.6 percent of Hispanics were poor, compared to 9.9 percent of non-Hispanic whites and 12.1 percent of Asians."

So the poorest races cannot afford to attend college and then have to shell out more money for auto insurance. Legally, car insurance companies cannot use your income to factor your premiums, but by using your education level, they have a pretty good idea of how much you're earning.

In 2014, the median annual income for Americans with a high school degree was:

  • $36,000 for Whites
  • $31,000 for Asians
  • $31,000 for Hispanics
  • $30,000 for Blacks

Drivers with bachelor's degrees typically pay 10% - 45% less than drivers who don't have a degree. Plus, earning a bachelor's degree raises median annual incomes to:

  • $59,000 for Whites
  • $60,000 for Asians
  • $49,000 for Hispanics
  • $47,000 for Blacks

Unsurprisingly, advanced degrees have the highest impact on median annual income:

  • $72,000 for Whites
  • $81,000 for Asians
  • $64,000 for Hispanics
  • $60,000 for Blacks

Here's how these numbers look all together

average income amounts

However, let's take a look at the demographics for the doctoral graduating class of 2009-2010:

  • Whites - 74.3%
  • Blacks - 7.4%
  • Hispanics - 5.8%
  • Asian/Pacific Islanders - 11.8%
  • American Indians/Alaska Natives - 0.7%

Notice anything?

Even though the majority of advanced degree holders are white and earn enough to pay higher insurance rates, their premiums are often less than those of minorities without degrees who make half of what they do in salary.

So by giving discounts to drivers with higher education, insurance companies know that the majority of these savings will not apply to minorities, who will then get stuck with high insurance rates unless they change other lifestyle indicators like their profession.

Yes, your occupation also affects your insurance premiums as well.

High/Low-Risk Occupations

safe jobs cost less

Insurance companies love managerial or supervisory titles when it comes to occupations because it correlates with responsibility, self-control, adherence to the rules, and less risky behavior.

However, if you're not in one of these positions and aren't intent on climbing the corporate ladder, you could be missing out on essential discounts.

Additionally, DMV.org says that car insurance companies even have specific occupations tagged as either high-risk or low-risk based on their algorithms - and you can bet you'll be paying more if you're in a high-risk position.

Low-risk jobs include:

  • Pilots
  • Nurses
  • First Responders
  • Scientists
  • Teachers
  • Accountants
  • Artists

Drivers who enter these types of professions are detailed-oriented, follow the rules, and emotionally and mentally stable. Unfortunately, you need an advanced education to qualify for the majority of these jobs, so chances of minorities filling these positions and earning car insurance discounts are slim.

On the bright side, low-risk job holders have lower accident rates and therefore file fewer claims the insurance company has to pay for. Their premiums are cheaper than those of drivers in high-risk occupations, which include, but are not limited to:

  • Doctors
  • Lawyers
  • Architects
  • Real estate agents
  • Business Owners/Executives
  • Salespeople

Drivers in these occupations may be charged more because their jobs usually involve high stress, long hours of traveling to appointments, and a lack of sleep, which all increase the chances of getting into an accident.

Which brings us to another point: Are minorities more prone to accidents and moving violations?

Driving Behaviors

speeding tickets raise rates

One of the factors your insurance company uses to determine how risky you are is your driving history. If you collect speeding tickets like baseball cards, get a parking violation every month, or find yourself in fender-benders all too often, your insurance company is going to see you as less than desirable to cover.

When insurance companies think you're going to cost them claims that amount to more than what you're paying them in coverage, they're going to raise your rates to prepare for the big settlement they predict in their future.

[What about accidents? Check out our 3D interactive to see what investigators look for.]

And how do they have the ability to foresee this information? By using statistics.

Take this 2009 report from the National Highway Traffic Safety Administration (NHTSA) as an example:

During 2006, 75% of passengers in vehicles driven by American Indians were killed because they weren't wearing their seatbelt. This is the highest percentage, but Blacks come in second with 62%.

A total of 1,254 children were killed as occupants of a passenger vehicle that year. "Of those children where restraint use was known, 52 percent of African-American children were unrestrained at the time of the crash - the highest percentage of any race or ethnicity."

Of American Indians killed in traffic crashes, 48% of them occurred as a result of driving under the influence of alcohol - the highest percentage for any race and ethnicity. Hispanics were close behind with 36% of their traffic fatalities occurring as a result of DUI.

No, your insurance company cannot base your premium on your race, but as we've seen with other factors, they have ways of inferring your race and driving history without ever needing to know what color your skin is.

Plus, if you get pulled over or ticketed, there's a literal record of your poor driving behavior. Insurers have access to this information, and they can use it against you.

But is this fair?

A piece in The New York Times examined the rate of racial profiling during police stops in seven states with the most comprehensive reporting requirements - Connecticut, Illinois, Maryland, Missouri, Nebraska, North Carolina, and Rhode Island.

Their data proved that police officers were "more likely to pull over black drivers than white ones, given their share of the local driving-age population."

By analyzing "tens of thousands of traffic stops made by hundreds of officers since 2010," they discovered that even though black drivers were just 39% of the driving-age population in Greensboro, NC, they made up 54% of the drivers pulled over.

While officers stopped and searched the vehicles driven by Blacks more than double the rate of searching Whites, they found contraband in the vehicles of:

  • 52% of Blacks
  • 62% of Whites

In fact, in all of the states mentioned, "only the Rhode Island State Police found contraband more often among Blacks."

The article claimed that Rhode Island and Connecticut have each revised their stop and search practices, but what about other states?

If you're getting pulled over more, you have a higher chance of getting a ticket. This is why it's so important to keep your vehicle's registration and insurance up to date, fix all broken lights on your car immediately, and follow the rules of the road. By doing no wrong, you'll give an officer less reason to pull you over, write you a ticket, and compromise your insurance rate.

Besides your driving history, insurance companies also have access to your financial history. And if they don't like the numbers they see, you can guarantee you'll see it in the form of a higher insurance premium.

Credit History

good credit is less premium

In many states, your potential car insurance company is allowed to use your credit history to determine your premium. If you have a low credit score, prepare to pay more for car insurance the majority of the time.

Keep in mind that no one has a 'master credit score' since the three credit bureaus use different calculations to create their specific scores. For example, FICO scores are the most widely known and used credit scores, ranging from 300 to 850. You may have a 740 FICO score, but you may also only have a 700 Equifax score.

Here's a universal credit rating scale:

  • Bad credit: 300 - 550
  • Poor/Subprime credit: 550 - 620
  • Fair/Acceptable credit: 620 - 680
  • Good credit: 680 - 740
  • Excellent credit: 740 - 850

Do you know where your credit score falls? It's important to know that before shopping for car insurance.

While the insurance companies cite studies linking higher credit scores with safer driving habits, Consumer Reports says that drivers who had been convicted of driving under the influence, but had excellent credit ratings, still paid lower premiums than drivers who had good driving records, but poor credit scores.

As Consumer Reports notes: "A poor credit score could add $1,301 to [your] premium, on average" regardless of your driving behavior.

But should insurance companies have access to your credit scores? After all, landlords and even potential employers are now asking for credit scores from their applicants. Some say giving out your credit score can have negative repercussions if it gets into the wrong hands.

"Credit reports and scores are not race neutral. Rather, they embed existing racial inequities in our credit system and economy - to the point that a person's credit information serves as a proxy for race."

For generations, banks systematically redlined Black and Latino neighborhoods with "high-cost, predatory loans, intrinsically risky financial products that predictably lead to higher delinquency and default rates than non-predatory loans."

Not being able to qualify for a mortgage also hurts minorities since mortgage payments - but not rent payments - count towards raising your credit score.

According to the Huffington Post: "74.7 percent of Whites now own their own homes, compared to rates of 47 percent for Latinos, 45 percent for African-Americans, and 57.3 percent for other races."

On top of that, since minorities are not paid as highly as white employees (as we saw from our earlier statistics on median income), they rely on their credit cards for most of their expenses.

As a result, Blacks and Hispanics are more likely to have poor credit scores than their white counterparts. Which translates to higher premiums for car insurance.

You're not the only one who finds this situation unfair. Norma Garcia, a senior attorney with Consumers Union, the policy and action division of Consumer Reports, says, "If you've had a drunk-driving conviction, chances are you're a worse driver than someone out there who has a [low] credit score."

Ever Heard of Price Optimization?

let your fingers do the walking

Price optimization in auto insurance terminology is a fancy way of asking, "How likely are you to shop around for different insurance rates?"

Doug Heller, a consultant for the CFA, notes that "low-income drivers often are less likely to shop around for competitive rates partly because of lower financial literacy."

You don't need a degree in economics to know that shopping around for a car insurance quote is just as important as shopping around for the best price on electronics. One quote does not necessarily carry across all insurance companies. Different company calculators weigh certain factors more than others.

Even though you could save big just by switching car insurance companies, if you haven't done so and continue to pay high premiums, your insurance company will raise your rates because they believe you'll still pay them.

Don't let your insurance company hold you captive. Check out our free quote tool to see if you're paying too much for car insurance. Just plug in your ZIP code, answer a few quick questions, and you'll have an unbiased quote from several providers in a flash.

Speaking of ZIP codes, did you know that where you live can affect how much you're paying for car insurance?

Location Matters

According to a report by the CFA, your location, and your neighbors may be raising your car insurance rates, too.

The CFA reviewed quotes from the five biggest insurance companies to compare rates for annual premiums based on different locations. They used a "30-year-old woman with a perfect driving record, who rents her home, works at a clerical job, and has a fair credit score" as their driver in all quotes.

They discovered that:

  • The average premium in upper middle-income, predominantly African-American ZIP codes is 194% higher than the average premium charged in an upper middle-income, predominantly white ZIP code ($2,113 vs. $717)
  • In the densest urban centers, the average premium in predominantly African-American ZIP codes is 60% higher than the average premium in equally dense predominantly white urban ZIP codes ($1,797 vs. $1,126)
  • On average, drivers in predominantly African American communities are quoted premiums that are 70% higher than drivers in primarily white communities ($1,060 vs. $622)

"These findings suggest a troubling pattern of high rates in African-American communities regardless of driver history," Tom Feltner, Director of Financial Services at CFA, commented.

A worrisome pattern that should be regulated, according to Feltner. He continued:

"It is urgent that regulators, lawmakers, and the industry take a hard look at these findings and address the impact of high auto insurance prices on drivers living in predominantly African American communities."

What's Being Done to Stop Racial Profiling

regulation to end discrimination

J. Robert Hunter, actuary, Director of Insurance for CFA, and the former Insurance Commissioner of Texas says:

"The pricing disparities for state mandated minimum auto insurance coverage quoted to drivers in primarily African American communities are hard to fathom actuarially and look a lot like unfair discrimination."

Hunter remarked that the state has laws that seem to contradict each other; one mandates auto insurance and the other forbids discrimination, yet the two coexist. The people who cannot afford insurance get priced out of inexpensive plans based on factors that have nothing to do with their driving capabilities.

Only three states - Massachusetts, Hawaii, and California - have laws stopping insurance companies from using drivers' credit scores to determine their insurance rates.

And Pennsylvania, Ohio, California, Indiana, Florida, and Maryland already prohibit insurance companies from using price optimization.

According to The National Conference of State Legislatures, almost a dozen other states have been introducing legislation to keep insurance companies from using personal information such as credit scores and education level to price their rates for consumers.

"[Car insurance is] like a utility in that everybody needs it," Heller said. "But it's not like a utility in that pricing is wildly different from one consumer to the next."

Unless you live in California.

What Makes California Different?

As Sarah Breitenbach writes for the Pew Charitable Trusts, equality advocates praise California for having the oldest and most comprehensive insurance rate structure designed to protect consumers. They even have a program to help low-income drivers afford low-cost insurance.

'"[In California] you need to provide the documentation and convince state experts that you're not ripping your customers off," Heller said. "Where, in most states, we're not going to take a second look."'

Thanks to a voter referendum in 1988, California's Proposition 103 forces insurance providers to prioritize three big factors when calculating premiums:

  1. Years of driving experience
  2. Number of miles driven each year
  3. Driving record/history

Insurance companies are allowed to consider lifestyle factors like the ones we covered earlier (i.e. age, marital status, ZIP code, etc.) only after these big three. Furthermore, the big three factors must have more influence than other socioeconomic factors that may be biased against certain races. It's the hope of many state legislators to pass this kind of referendum across the country.

But since you can't change your race and a move to California may be out of the question, what can you do to lower your car insurance rates right now?

What Can YOU Do?

friends shopping for rate

Here are a few tips to help you lower your car insurance rates. Remember, you can always call your insurance provider periodically to update your driver profile and qualify for additional discounts.

For example, if you recently switched jobs and halved your work commute, you may now get a discount for driving less during the most congested time of the day (rush hour).

Similarly, if you switched from graveyard shifts to mid-afternoon hours, you may also see a decrease in your premium since driving between midnight and 4 a.m. is considered the riskiest window for driving, as you're typically battling tired and/or intoxicated drivers on the road.

Check out these other recommendations:

  • Shop around for the best quote and don't settle for the first one
  • Keep your driving record free of accidents, tickets, and other moving violations
  • Drive under 12,000 miles/year; walk, take mass transit, carpool, or consider working from home to save big on car insurance
  • Look for discounts from auto clubs, trade groups, or unions that you belong to
  • See if your insurance company offers discounts for driver's ed or a defensive driving class
  • Work with an agent to see if you can drop certain coverage, raise your deductible, or bundle your home/renter's insurance for savings
  • Ask your insurance company about usage-based insurance, which will help your premium more closely match your driving behaviors

Check out this article if you have a teenager and need help saving money on car insurance for them.

Prepare for insurance milestones that will either cost or save you money, so you're not blindsided when you see a rate hike

The truth about car insurance that the big agencies don't tell you is that they use certain personal information about you to calculate a rate that reflects how you fit their statistics, which can be racially biased.

If you happen to fall within these groupings, i.e. you went through a bad divorce and have a low credit score, but never had a car accident, find an insurance company that understands you as a person, not as a number in their algorithm.

You deserve the same discounts other drivers are receiving, so don't be afraid to speak up and ask for them!

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