The History Of Redlining & Its Impact On Car Insurance Prices
What is Redlining?
Redlining is a discriminatory practice that has been used in the United States for many years.
It refers to the act of denying or limiting financial services or other opportunities to individuals based on their race or ethnicity. This practice has had a huge impact on many aspects of society, including housing, education, and insurance pricing.
The term "redlining" was first used in the 1960s by sociologist John McKnight and community activist, William Julius Wilson. They used the term to describe the way that banks and other financial institutions drew red lines on maps of neighborhoods, indicating that they would not offer loans or other services to individuals living within those boundaries.
These neighborhoods were often predominantly Black or Hispanic, and the practice of redlining was used as a way to maintain segregation and prevent these communities from accessing the same opportunities as their white counterparts.
How Redlining Affects Car Insurance Prices
One of the ways that redlining has had a significant impact on society (even today) is through the use of zip codes in rating car insurance customers.
Insurance companies use a mix of rating factors to determine the right price for car insurance policies, including the age and gender of the driver, the make and model of the car, and the driver's history of accidents or traffic violations. However, insurance companies also use zip codes as a way to determine the risk of insuring a particular driver.
This means that people who live in neighborhoods that have been historically redlined or who live in zip codes where the majority of residents have low net wort, are sometimes charged higher car insurance premiums. Despite having a clean driving record, depending on where you live—the price of your car insurance policy may be affected!
This practice has been found to disproportionately affect individuals living in predominantly Black and Hispanic neighborhoods, leading to higher insurance costs and a contiunous cycle of economic inequality.
So, Does Your Zip Code Affect Car Insurance?
The short answer is yes, your zip code can affect the price of your car insurance.
Traditional car insurance companies use a variety of irrelevant rating factors to determine the price of insurance policies and your zip code is one of many. The reasoning behind this is that certain zip codes are associated with higher rates of accidents, theft, or other risks. For example, an insurance company may charge higher premiums for drivers living in a zip code with a high rate of car accidents or a high crime rate, as these factors increase the likelihood that the insurance company will need to pay out a claim.
A study conducted by the Consumer Federation of America (CFA) in 2015 found that, on average, drivers living in predominantly Black neighborhoods paid 71% more for car insurance than drivers living in predominantly white neighborhoods.
Similarly, drivers living in Hispanic neighborhoods paid 29% more for car insurance than those living in predominantly white neighborhoods. The data shows that the use of zip codes in rating car insurance customers can have a negative impact on many people, people who could actually be great drivers.
The Legacy of Redlining and Its Impact Today
Redlining is a practice that has had a long and lasting impact on communities in the United States. The discriminatory policies that were put in place during the 20th century have contributed to the economic disparities that continue to exist today.
In recent years, there have been calls to reform the car insurance industry and address the issue of redlining.
Some states have implemented laws that prohibit insurance companies from using certain factors, such as zip codes, in determining the price of insurance policies. Other states have implemented regulations that require insurance companies to justify the rates they charge and to demonstrate that they are not unfairly discriminating against certain groups of individuals.
Why We Use Your Zip Code Differently At LOOP
While these efforts have made some progress in reducing the impact of redlining on car insurance prices, there is still more work to be done.
Despite the progress that has been made in addressing redlining and its impact on car insurance prices, it is important to recognize that the legacy of this discriminatory practice continues to have a profound effect on communities today. To actually address the issue of redlining, we don’t just look at your zip code when pricing your policy. We look at your driving habits at the street-level—using telematics and your driving habits to price you fairly.
If you want to see how your car insurance pricing could change when a company only looks at what matters, check out what your price here.