Despite the higher profiles of mortgage lending, student aid, and payday loans, nowhere is a de facto tax on the poor more commonly found than in the realm of auto insurance.
For nearly 90 percent of American households, what links home, school, and work is the automobile. The car is the most commonly held non-financial asset in America. By law in almost every state, one’s car must be insured. So auto insurers occupy a unique and protected status within the U.S. economy: People are required by the government to purchase car insurance, but they can only get it through the private sector on a for-profit basis.
Discussions of the wealth gap need to include purchases like car insurance—a small bill relative to expenses like student loans, but one that adds up over time. Since people underestimate how much savings they’re missing out on because of small (yet repeated) household decisions, the impact of these small household decisions on the wealth gap frequently gets passed over in favor of attending to big-ticket, single expenditures such as home and college. Patterns exacerbating the wealth gap might be particularly instructive in the zero-sum world of auto insurance, where there is an active and ongoing transfer of wealth in the form of discounted insurance rates that funnels money from one pool of insured drivers (the poor) to another (the wealthy).
Transportation is a critical factor in upward mobility. Labor economists, sociologists, and urban policy historians have all documented the geography of opportunity related to reliable transportation. Matching state data on auto insurance premiums to a micro-sample of car ownership and labor market outcomes, one 2002 study in the Journal of Urban Economics found that those with cars are 27 percent more likely to be employed, work on average 11 to 16 hours more a week, and earn 40 percent more per hour than those without cars. “Losing access to a car is equivalent to a reduction in income,” the study’s authors concluded.
Within the realm of reliable transportation, auto insurance remains an inescapable financial expenditure. “Owning a car creates expenses far beyond the purchase price, including insurance, which is much more costly for city dwellers than it is for suburban motorists,” sociologist William Julius Wilson writes. A rate analysis of some 33,313 U.S. zip codes (of the approximately 43,000 zip codes nationwide) from the six largest insurers reveals that the typical urban motorist pays $247 more each year in insurance premiums for mandatory liability than a suburban motorist with the same statistical profile (e.g., age, gender, make and model of car, annual miles driven) and driving record (e.g., no tickets, no accidents). Thus, simply moving from an urban area to a suburban one saves a driver, on average, $247 each year.
While the financial costs of postal code profiling may not seem like much, the $247 is larger than the $227 the bottom 60 percent of taxpayers would have received under the proposed 2001 Bush tax cut — a tax cut that was often justified publicly as a way to stimulate the U.S. economy. Extrapolated over the 50 years the average American drives, that $247 annual gap grows to $12,350. Worse, driving without insurance can result in imprisonment and fines and, in the event of an accident, astronomical reparations for loss of life and property. It’s not that urban motorists are, in the abstract, unable to afford insurance; rather, it is that the zip code calculus used by insurers exacts a high-cost premium on them, often pricing these drivers out of the market altogether.
Insurers consistently claim that their policies are color-blind, but the stickiness of race remains an inescapable if submerged theme. While policies today may not explicitly factor race into pricing, today’s insurance rates are an inheritance of Jim Crow. The disparate racial intent and impact of insurance pricing has “locked-in” inequality almost from the start. Throughout much of the 20th century, insurers targeted and sold blacks different, more costly products. These disparate pricing policies touched every aspect of black policyholding, including stock options; pensions; and health, life, and, of course, auto insurance. Race-based practices of insurers resulted in blacks receiving higher premiums and lower stock options. Nonwhites were frequently subjected to more complicated application processes that yielded smaller, more expensive policies and fewer benefits.
But with the onset of civil rights legislation in the 1960s, insurers feared that their long-held practice of listing the race of account holders on applications might potentially fall under greater civil rights scrutiny and possible enforcement. So industry leaders simply replaced race with “area underwriting.” Area underwriting was put on revised application forms without questions about race. Area underwriting would become virtually interchangeable with zip code zones and would be adopted in every sector of the insurance business, including auto insurance. With the feminization of poverty, women too have paid higher rates than men. Women have been more likely than men to live in poorer zip code areas where rates tended to be higher regardless of the merit of the motorist.
Aggravating all of this is the lack of reliable, effective public transit in many parts of the country. As industrial jobs have moved from central cities to suburbs, changes in the structural economy have been exacerbated by declining public support for mass transportation. As William Julius Wilson has written about the disappearance of upward mobility in the nation’s inner cities, “Among two-car middle-class and affluent families, commuting is accepted as a fact of life.…In a multitiered job market that requires substantial resources for participation, most inner-city minorities must rely on public transportation systems that rarely provide easy and quick access to suburban locations.” The collapse of mass transit has been yet another factor contributing to the erosion of upward mobility.
Making auto pricing fairer should be relatively low-hanging policy fruit and an easy sell for politicians to put money back into the pockets of voters. We should demand a system in which insurance fees are based on the merit of the motorist, one with few accidents and traffic tickets. Such notions of individual merit should be second nature in our society. But these reforms seem unlikely to happen so long as lawmakers and their campaigns remain heavily underwritten by those like the insurance lobby, ensuring that auto insurance will continue, effectively, as a tax on the poor.