What is Redlining? How Does It Affect Auto Insurance?

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Redlining is a controversial car insurance practice where certain communities pay higher rates for car insurance.

In this article, we’re explaining everything you need to know about redlining and how it affects your auto insurance premiums.

What is Redlining? How Does It Affect Auto Insurance?

What Does “Redlining” Mean?

If you guessed that “redlining” has to do with “red lines,” then you’re partially correct. Redlining is an insurance term first introduced by sociologist John McKnight in the 1960s who realized that banks and insurance companies refused to do business in certain areas.

Banks and insurance companies declared certain ZIP codes, neighborhoods, or communities to be high risk, so they refused to do business in those areas.

Some neighborhoods had high rates of car insurance fraud, for example, while others had high rates of vehicle theft or vandalism.

Some insurance companies would literally draw a ‘red line’ on a map outlining their coverage area. Insurance salespeople were prohibited from doing business in any area with red outlines.

Or, insurance companies might charge significantly higher rates to any drivers living within the ‘red line’ area.

However, sociologists like John McKnight realized a trend: maps tended to be “redlined” based on racial, religious, or ethnic lines. Insurance companies were using redlining to charge higher insurance premiums to certain neighborhoods and communities – even when risk was equal.

Because of redlining, a car insurance company might be accused of selectively raising insurance prices in a low-income neighborhood. Or, a health insurance company might be accused of denying coverage to someone of a certain race. Home insurance companies were also accused of charging higher insurance premiums to certain ethnicities.

Redlining Gets Exposed in the 1980s

Redlining was a common practice in the insurance industry for decades. In the 1980s, however, redlining gained nationwide attention when journalist Bill Dedman published a series of articles titled, “The Color of Money”. The articles explained the racial inequality of redlining.

Dedman’s investigation revealed that banks would lend money to low-income whites but not to middle-income or upper-income blacks, for example.

In other words, banks weren’t really using risk to calculate insurance premiums: they were using redlining to mask racial segregation.

Dedman received a Pulitzer Prize for his work. The insurance company’s redlining practices were exposed, and some states took action against the practice. California, for example, passed a referendum in 1988 to ban redlining. A report from the mid-2000s found that the referendum had saved California drivers over $1 billion since being enacted.

Modern-Day Redlining

States made efforts to end redlining, but redlining is still around today. Insurance companies and banks are regularly accused of redlining, for example. Car insurance companies continue to be accused of charging higher prices to certain races or ethnicities.

In July 2014, for example, The Guardian published an article finding that white drivers paid 15% less for car insurance than black drivers – even though the drivers had equal risk profiles:

“If you want to save 15% or more on car insurance, you may have to move – to a white, suburban neighborhood,” explained the article.

Some drivers interviewed in the article found that insurance premiums skyrocketed after moving five minutes down the street. Drivers in inner-city Detroit, for example, pay an additional $1,200 for car insurance per year, on average, compared to drivers in the suburbs.

You might argue that it’s more about risk than race. Don’t certain neighborhoods have a higher risk than others? Don’t certain neighborhoods have higher rates of break-ins, theft, and vandalism than others? Why can’t insurance companies charge higher insurance prices for drivers who live in high-risk neighborhoods?

Unfortunately, studies have shown that even when risk is controlled, drivers in predominantly white neighborhoods in the United States tend to pay significantly less for car insurance than drivers in predominantly black neighborhoods.

In April 2017, ProPublica.org published an article titled, “Minority Neighborhoods Pay Higher Car Insurance Premiums Than White Areas With the Same Risk”.

“Our analysis of premiums and payouts in California, Illinois, Texas, and Missouri shows that some major insurers charge minority neighborhoods as much as 30 percent more than other areas with similar accident costs.”

Is Redlining Wrong?

Redlining for ethnic, gender, or religious reasons is inappropriate.

However, critics argue that free markets always develop natural redlines. A business will only operate in a neighborhood if the business can make a profit in that area.

If someone parks their car on the street in a neighborhood with a high risk of theft, break-ins, and vandalism, then that person will pay less for car insurance than someone who parks their car in a locked garage at night.

Of course, as mentioned above, racial-based redlining continues to exist in the United States – even when risk is equal between two neighborhoods.

For that reason, redlining continues to be a controversial practice.

Car Insurance Companies Can (And Do) Change Premiums Based on ZIP Code

How does redlining impact car insurance premiums? Redlining may not be officially legal, but insurance companies still use your location to calculate insurance premiums.

Today, it’s perfectly legal for a car insurance company to alter your insurance premiums based on ZIP code.

If you live in a safe suburban neighborhood with low rates of insurance fraud, accidents, and break-ins, then you may pay lower prices for car insurance than someone who parks their car in a rough neighborhood downtown that has high rates of break-ins and vandalism.

When you enter your ZIP code on a car insurance application form, the insurer will use this information to calculate your premiums.

You may be able to negate the effects of a “rough” ZIP code by parking your car in a locked garage at night. Or, ask your insurance company about other car insurance discounts.

Final Word on Redlining

Redlining is a business practice used by banks and insurance companies to prohibit certain customers from accessing services.

Car insurance companies might charge higher rates to drivers in certain ZIP codes or neighborhoods, for example. Insurance companies argue that these neighborhoods have a higher risk of insurance fraud, accidents, theft, and other claims. Critics, meanwhile, claim that redlining is racially-based and that insurance companies charge different prices even when risk is equal between two neighborhoods.

Like we said – redlining and location-based insurance premium calculations continue to be controversial.

Ultimately, redlining continues to be a controversial practice across the United States. Although insurance companies can no longer draw red lines around certain ZIP codes, they can – and do – charge higher prices to drivers in certain ZIP codes.

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