Citizens Advice finds ‘ethnicity penalty’ in UK car insurance

Citizens Advice has urged the UK’s financial regulator to investigate possible evidence of an “ethnicity penalty” in the car insurance market, after the charity found that people of colour were paying hundreds of pounds more in premiums than white customers.

In a report published on Tuesday, the consumer advice organisation highlighted a “worrying trend” between ethnicity and the cost of insurance that could not be explained away when common risk factors were taken into account.

The study analysed data from 18,000 people who sought debt advice from the consumer group last year, which found that people of colour were spending £250 more on average than white people to insure their vehicles, a trend that held even when researchers adjusted for gender, age and income.

Citizens Advice also conducted a “mystery shopping” exercise which found that people living in areas with a high proportion of black or south Asian residents paid at least £280 more for their insurance. That disparity could not be fully accounted for by differences in deprivation or crime rates, the charity said.

The charity has called on the Financial Conduct Authority to “lift the bonnet” on pricing models by requiring insurers to audit and monitor outcomes to identify racial disparities and for the regulator itself to measure correlations between profits and racial composition of local geographic areas.

Previous campaigning by the charity led to a big shake-up of the car and home insurance market at the start of the year, after Citizens Advice complained about a practice known as price walking, which resulted in so-called loyalty penalties where insurers profited by luring in new customers with low prices and ratcheting up renewal premiums.

Matthew Upton, director of policy at Citizens Advice, said the evidence in the report should be enough for the regulator and industry to make pricing of premiums “a more transparent process from here on in”.

The methodology used by insurers to calculate premiums is notoriously opaque, relying on a mixture of factors such as claims history and local crime statistics.

The report said that without access to the data held by insurers it would be “impossible to definitively identify what is driving [the ethnicity] trend” or to establish whether pricing was “proportionate to the risk presented to an insurer.”

It added it was “concerned that the opaque pricing algorithms used by insurance companies . . . could be reflecting and perpetuating human biases or wider inequalities caused by systemic racism.” 

The Association of British Insurers said its members complied with equality laws and “never” used ethnicity as a factor when setting prices.

“All other rating factors being the same, two people of different ethnicities who live in the same postcode will pay the same premium for their car insurance,” said James Dalton, the body’s director for general insurance policy.

The FCA said it would “continue to consider any evidence we receive of concerns around pricing”. It welcomed the report, saying it highlighted “a risk of discrimination based on race and raises some potentially challenging questions for insurers”.

It added that insurers “must also be able to assure themselves, and us, that any risk factors they include also do not result in discrimination.”

In 2018, the regulator said it had found “no evidence of direct discrimination” on protected characteristics such as race, but added that it remained concerned that some firms were using data in pricing that could “implicitly or potentially explicitly relate to race or ethnicity”.