Citizens Advice coined the term ‘ethnicity penalty’ in 2022 to describe when people of colour pay higher insurance premiums than white people – how is the sector ensuring that ethnicity is not influencing pricing?

WE ASKED:  How can insurance firms combat the pricing and reputational challenges arising from the reported ethnicity penalty?

Stephen Kennedy, director of insurance pricing, Pearson Ham Group

Stephen Kennedy hires

Stephen Kennedy

Although it’s unlikely that insurers are pricing based on ethnicity, on average, people from ethnic minority backgrounds can pay more for their car insurance.

This disparity is not directly linked to their ethnicity, but to factors such as being more likely to be less affluent, living in deprived areas and having limited access to credit.

According to figures from the Office for National Statistics (ONS), published in 2021, 77% of white people were employed at this time, compared to 69% of people from across all other ethnic groups combined.

Of those in employment, just 12% of white households were defined as being in persistently low income, compared to 27% of black households.

Credit data is widely used in car insurance pricing. Drivers with lower credit scores are more likely to make claims, which is reflected in the premiums quoted.

However, those falling into this category are largely from lower affluence groups.

A more nuanced pricing approach may mitigate some of this premium penalisation. Insurers should try to identify good risks within populations that statistically appear to be bad risks.

This area is where competition is less intense and competitive advantages can be gained. New data sources or interactions could support this effort and address protected characteristics.

However, the ethnicity penalty is a broader societal issue – not just an insurance one.

Ian Hughes - new-2

Ian Hughes

Ian Hughes, chief executive, Consumer Intelligence

The issue of an ethnicity penalty in insurance pricing is complex, but needs clear explanation. It’s crucial to understand that insurance firms base premiums on risk, not ethnicity.

Think of it like a car’s satnav system – the satnav directs drivers based on traffic conditions, not based on who is driving.

Similarly, insurers set premiums based on claims data from different areas, not based on the people living there.

If one area has more claims, it gets higher premiums. Conversely, areas with fewer claims enjoy lower premiums.

A problem arises because certain ethnic groups might live in areas with higher claims, creating a perceived ethnicity penalty.

This is not about discrimination, but about risk assessment based on geography.

However, insurers can’t gather data on ethnicity to prove there’s no bias, which is like being asked to prove a negative without evidence.

To tackle this, insurers should focus on transparency and education. By explaining how premiums are calculated and ensuring this process is understood, they can address any concerns. Engaging with communities on this is essential.

Ultimately, insurers must balance accurate risk assessment with fair treatment for all policyholders, ensuring that the system is clear and equitable for everyone.

James Daley, managing director, Fairer Finance

James Daley2

James Daley

The accusation that insurers are discriminating against ethnic minorities in their pricing does not appear to be going away.

I’ve never believed that there is any intention among insurers to discriminate – but the accusation raises a bigger question about how insurers determine each customer’s price.

As things stand, there’s no transparency around what goes into each insurer’s pricing algorithm and most industry participants believe it would undermine their competitive position if they had to disclose this.

From the work we’ve done with insurers, I know that some have fairly simple algorithms, sticking to basics like postcode, age and vehicle. 

Others use a whole range of data – from occupation to credit history, to loyalty card data.

By refusing to reveal what goes into their pricing algorithms, insurers leave themselves open to accusations of discrimination and the possibility that politicians will eventually choose to draw tighter boundaries around what data insurers can and can’t use to price.

The ethnicity penalty is, in my view, almost certainly driven by social factors. Ethnic minorities are more likely to live in higher risk postcodes.

But, without opening up about how prices are calculated, insurers will continue to leave themselves open to accusations of discrimination.