How ‘Big Data’ Can Contribute to Racial Bias in Insurance Rates

A number of consumer studies these last years have sounded the alarm on the use of factors such as credit scores, college degrees and postal codes in setting home and auto insurance rates. Advocates say this can lead to proxy discrimination, with people of color in urban neighborhoods sometimes charging hundreds of dollars more for coverage than their suburban neighbors.

Today, some regulators say they are pressuring the insurance industry to rethink its relationship with “big data” and artificial intelligence.

Fifty years ago, setting a rate for, say, an auto insurance policy depended on just a few metrics: where you lived, your age and gender, your vehicle, and what kind of driver you were. Dave Snyder from American Property and Casualty Insurance Association said this tended to result in three rate tiers.

“’Really good’, ‘a little average’ or ‘really bad. “The problem is, these broad categories really treated a lot of people unfairly in all of them,” Snyder said.

Snyder said now, because insurers can buy all kinds of data on you, you should receive a much more personalized rate.

“We are much more capable of setting a price that reflects each individual insured’s exposure to future risk,” he said.

While this may seem like a positive development, insurance regulators say there is a problem.

“I’m not sure any of us really understand how our data is being used right now,” the Connecticut insurance commissioner said. Andrew Mais.

Complex algorithms analyze hundreds of data points on each consumer, many of which are purchased from unregulated suppliers. One Mais said he has seen the number of households in your neighborhood that include a grandparent used in setting home insurance rates.

“The neighborhood unemployment rate, the average number of occupants per household, the distance to the nearest restaurant,” he said. “I don’t think it is too much to think that this could be inherently discriminatory.”

But is the first black to be a commissioner in Connecticut, and he calls for reform. In 2020, the National Association of Insurance Commissioners recognized the centuries-old history of racial discrimination in the industry and formed a special committee consider taking action.

One year later, he promised more research and also suggested that the industry collect racial data on customers to start measuring disparate impacts.

But some advocates say they are not happy.

“In reality, they didn’t advance the ball at all,” said Doug heller from the Consumers Federation of America. “If state law requires you to purchase auto insurance, state regulators have a special duty to make sure it’s fair. “

Heller points out Colorado and California are among the states that have taken steps to hold industry to account.

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