Citizens Advice report calls on FCA to explore insurance ethnicity penalty

On 31 July 2024, Citizens Advice published a report in which, for the third time, it claimed “people of colour were paying 39% more for car insurance than white people, rising to 42% for Black people.” Whilst many question the existence of an ethnicity penalty in motor insurance sector, Citizens Advice highlights a failure to provide evidence disproving it.

The report Popping the Bonnet: Exploring affordability issues in car insurance and the ethnicity penalty, published 31 July 2024, explores the impact of growing car insurance costs on those who have approached the body for help and the effect of the ’ethnicity penalty’ on affordability.

Citizens Advice first published research on the ethnicity penalty in motor insurance in March 2022, suggesting that people of colour may pay £250 more annually for car insurance than white people, and that, on average, areas with large communities of colour bore higher insurance prices.

The body noted that, “how the price of insurance is calculated is complex, and it is not always clear if the price is fair”, continuing:

“While there are a range of factors that influence insurance pricing, we’re concerned that our research suggests that areas with large communities of colour may be identified as more risky, even when objective risk factors are controlled. As markets evolve and the use of ‘big data’ and algorithms in setting prices becomes more prevalent, there is a risk that these inequalities are perpetuated and amplified.”

The report explores the effect of an alleged ethnicity penalty against the backdrop of the wider rise in motor insurance costs and impact of the cost-of-living crisis. It notes that client data between June 2023 and June 2024 revealed people are paying, on average, 23.5% more for car insurance- an upward trend supported by Association of British Insurers (ABI) data which revealed the average price for car insurance was up by one third in Q1 of 2024 compared to the same time last year.

According to CA, the findings highlight a risk of “high car insurance costs […] placing even higher strain on people of colour, putting them at greater risk of being priced out of this essential market”.

Key findings in the CA report:

• High prices are resulting in people having to cancel their insurance or make cutbacks in other areas of essential spending.
• On average, car insurance costs were £307 higher for people of colour than white people.
• People of colour were paying 39% more for car insurance than white people, rising to 42% for Black people
• High prices are hitting some groups even harder. For example, white people in debt are paying almost 23% more for car insurance than the average premium reported by the Association of British Insurers (ABI), and people of colour in debt are paying 71% more

In 2024, the University of Bristol’s Personal Finance Research Centre (PFRC) also presented evidence to suggest a poverty premium inherent in motor insurance, along with an ethnic penalty “across both deprived and non-deprived areas, quotes were higher in more ethnically diverse places.”

However, the CA point out that “one year into the [Consumer] Duty we have still to see any explanation of why people of colour are paying hundreds of pounds more for insurance.”

The CA emphasise that, as the FCA previously set out that “assessing differential outcomes [...] such as differential pricing” would be key in determining whether firms are delivering fair value, discriminatory pricing should be a focus for the regulator when evaluating firms’ compliance with the Duty.

As insurers do not typically collect data on ethnicity, the CA note that the issue is likely a result of indirect discrimination, where policies or laws are applied equally across different customer groups resulting in worse outcomes for groups with protected characteristics. The body asserts that:

“indirect discrimination is at play if the policy can’t be proven to be “a proportionate means of achieving a legitimate aim”. Our findings mean that the insurance industry has a responsibility to empirically demonstrate that their pricing policies constitute a “proportionate means” or they must take steps to mitigate these discriminatory outcomes”

Given that the new UK Government referred in its manifesto to “investigating whether postcode pricing practices are unfairly targeting ethnic minorities and those on lower incomes”, the sector should prepare to have its pricing practices scrutinised closely.

Previously, the sector’s UK trade body released “multi-year strategy and work plan” to enable […] the insurance and long-term savings industry to be the most diverse, equitable and inclusive sector of the UK economy”. As DEI is more than just an employee issue, it could be argued that the sector must respond to question of the ethnicity penalty more effectively and persuasively to drive meaningful change forward.

Regardless of whether firms recognise the existence of an ethnicity penalty in insurance pricing, CA’s views are certainly topical. As the technology within the insurance sector continues to evolve and the use of data and algorithms to determine prices, insurers must navigate key ethical challenges, such as how to mitigate the risk of bias and discrimination and rationalise somewhat opaque calculations to evidence fairness.

What’s Next?

CA have called on the new Labour government to fulfil its pledge to urge the FCA to launch an investigation into the rising cost of car insurance and whether postcode pricing unfairly targets ethnic minorities and those on lower incomes.

The report urges the FCA to clarify what is driving both recent price rises and certain groups consistently facing higher prices, to explore how the use of factors such as postcodes or credit scores affects price and value outcomes, whether the use of such factors are consistent with the Duty and Equality Act, and whether the use of other available data could reduce differential outcomes for certain groups.