A year-long investigation by charity Citizens Advice has revealed a “shocking trend” of people of colour paying at least £280 more for their car insurance than white motorists.
The consumer champion is now calling the Financial Conduct Authority to ensure no one faces an “ethnicity penalty” when buying car insurance.
However, the Association of British Insurers (ABI) has disputed the findings, saying insurers “never use ethnicity as a factor when setting prices.”
As part of the investigation, Citizens Advice analysed 18,000 car insurance policies reported by people who came to Citizens Advice for debt help in 2021. It discovered that, on average, people of colour paid £250 more per year for their car cover than white people, regardless of gender, age, and income.
In the second part of the study, Citizens Advice compared car insurance quotes given to motorists in predominately white areas and areas with high proportions of people of colour.
Working with research firm Europe Economics, Citizens Advice carried out 649 mystery shops for car insurance quotes in the summer of 2021, using six different customer names across eight postcodes in England. The majority of the personal details submitted remained the same, including the car, occupation, and no claims history.
The mystery shopping revealed that people in areas where over 50% of the population were people of colour were being quoted an average of £282.81 more for car insurance than people who lived in postcodes where the majority of the population were of a Caucasian background.
Citizen Advice has called this the 'ethnicity penalty', and found it was even higher in areas with higher shares of people of colour - up to £950 per year.
During the mystery shopping, researchers used names often associated with certain ethnic groups, but found that these didn't have much impact on the prices quoted.
“This suggests this penalty is paid by everyone who lives in an area, regardless of their ethnicity. However, people of colour are [statistically] far more likely to pay it,” the charity said.
Citizens Advice found that when it comes to car insurance, people of colour are 13 times more likely to live in high-cost areas than white people, across the country. An estimated 754,000 people of colour hold car insurance policies and live in these areas, paying a total 'ethnicity penalty' of at least £213 million per year.
The charity also "stress-tested" the results, finding that factors like crime rate, deprivation, road traffic accidents, and population density could not account for the price differences.
For example, Citizens Advice examined car insurance quotes for a hypothetical driver of a Vauxhall Corsa in two postcodes in Bristol. In the area with a population comprised of 41% Black people and 18% South Asian people, the average quote was 51%, or £283, higher compared to a neighbourhood less than two miles away with an 87% white population and a higher relative crime rate.
“We’re concerned this suggests that areas with large communities of colour may be identified as more risky, even when objective risk factors are controlled,” the charity said.
Citizens Advice is now calling on the Financial Conduct Authority (FCA), the regulator with oversight over insurance companies, to require those firms to audit and account for their pricing differences and prove they abide by the Equality Act 2010. If the insurer can’t explain any ethnicity pricing differences, the FCA should take enforcement action, suggests Citizen Advice.
Dame Clare Moriarty, Chief Executive of Citizens Advice, said: “For too long the impenetrable nature of insurance pricing has just been accepted, but a £280-a-year ethnicity penalty cannot be allowed to continue.
“It is time for the FCA to lift the bonnet on insurance firms’ pricing decisions and ensure no one is paying more because of protected characteristics like race. The use of algorithms has real-world implications for real people. They must be applied with caution, under the careful scrutiny of regulators."
The ABI, the UK’s leading insurance trade body, has disputed the findings.
James Dalton, the director of general insurance policy at the Association of British Insurers, said: “Insurers never use ethnicity as a factor when setting prices, and our members comply with the Equality Act. All other rating factors being the same, two people of different ethnicities who live in the same postcode will pay the same premium for their car insurance.
“Insurance is priced on individual risk levels, and there are many different risk-related factors that are used to calculate the price… but ethnicity is not one of them,” he said.
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