Pedro Montenegro has an immaculate driving record.
But even though Montenegro said he has never been in a car accident, nor been issued a ticket for a moving violation, he has never in his adult life qualified for affordable car insurance. That's something that Montenegro, 30, who earns a "good living" as a public relations staffer in Washington, D.C., says is inextricably tied to his poor credit score, which is in the low 500s.
He most recently received multiple monthly premium quotes of around $350 for minimal coverage for one modest, used car — a figure he can't afford.
Montenegro, who is Guatemalan-American, faces the same struggle confronting millions of drivers across the country who have stellar driving records but pay higher premiums because they have poor credit or no credit history. Those two factors are far more prevalent among consumers of color. Subsequently, economists, consumer activists, state and U.S. lawmakers and even some regulators say that such practices amount to an egregious example of systemic economic racism, by which Black and Latino consumers pay higher premiums, even when they present less of a risk on the road.
“When insurance companies rely on peoples’ credit histories, they’re perpetuating the systemic biases that have plagued our society for generations,” Doug Heller, an insurance expert at the Consumer Federation of America, a nonprofit advocacy group, said. Heller added that it’s “uniquely wrong” that, in all but two states, drivers are required by law to buy car insurance, but the government doesn’t adequately regulate how it is priced.
Rep. Rashida Tlaib, D-Mich., has introduced legislation that would end the practice in consecutive Congresses. “Someone who hasn’t had access to banking or credit who is a good driver should not be paying more than someone with multiple DUIs who has access to financial stability,” she said.
Having identified this disparity, and the lack of federal action, a growing number of states are seeking to ban the reliance of auto insurance providers on credit-based pricing. A few insurance companies, in states where it's possible, have put in place measures to rely exclusively on driving behavior to determine premiums.
“It’s part of this critical element of economic opportunity in society, where prohibitively high rates can prevent you from getting to and from your job, or getting your kids to where they need to be,” Heller said.
Reliance on credit-based pricing inherently harms consumers of color, consumer experts and economists say, simply by virtue of the fact that people of color are far more likely to have bad credit, or no credit at all. According to a 2019 study by the Urban Institute, a left-leaning social policy think tank, more than half of white households in the U.S. had a FICO credit score above 700, compared with just 21 percent of Black households.
Another 33 percent of Black households with credit histories had insufficient credit and lacked a credit score at all, the study found, compared to just 18 percent of white households that lacked credit scores. Studies show the numbers are similar in Hispanic households.
Because nearly every auto insurer relies heavily on credit scoring, in various proprietary formulas, to determine pricing, people of color disproportionately pay more for auto insurance, experts said, with considerable research to back it up.
Research by the Consumer Federation, for example, has found that in ZIP codes with predominantly Black residents, consumer premiums are 60 percent higher than in predominantly white ZIP codes. That difference can amount to upward of $3,300 a year on annual premiums, according to Consumer Reports research.
“Referring to this as modern-day redlining is accurate,” said Darrick Hamilton, a professor of economics and urban policy at The New School for Social Research.
Insurance companies weigh different information in pricing rates. That tends to include not only credit history, but also age, type and amount of coverage sought, how much and how often one drives, and a plethora of personal information that can include gender, marital status, medical history, smoking status, education, job and ZIP code.
It's illegal to ask about race. In nearly all states, regulators explicitly set what can and cannot be examined to determine pricing.
Insurance trade groups have routinely defended their credit-including formulas. They say it’s part of a more comprehensive, risk-based methodology that allows consumers to, on the whole, pay less. These groups say that better credit correlates to fewer claims and accidents.
But even many within the industry, in the last 18 months, have acknowledged it might be time for a change. Last year, the National Association of Insurance Commissioners, a regulatory body guiding the industry, tasked a committee with studying whether certain underwriting practices were discriminatory. The committee on race and insurance, created in July 2020 in the aftermath of the murder of George Floyd, will meet this month to discuss what progress they've made.
States take the lead
The issue has attracted the attention of state lawmakers. Just this year, proposals prohibiting the use of credit-based pricing in the car insurance industry have emerged in Colorado, New Jersey, New York and Oregon.
“I simply do not understand why your credit score makes you any better or any worse as a driver," said New York state Sen. Kevin Parker, a Democrat who sponsored the bill. “It shouldn’t be more expensive for you to be Black or Latino in our state, period."
Those states, if their proposals are enacted, would join California, Hawaii and Massachusetts, which all outlawed the practice years ago.
In Washington state, the agency that oversees the insurance industry banned the practice for three years by emergency executive action this year after a bill that proposed doing so stalled in the Legislature.
“The argument by insurance companies that somehow a credit score is a reflection on their ability to keep prices low, that's preposterous," Washington Insurance Commissioner Mike Kreidler, a longtime credit score critic and former Democratic congressman, said in an interview. "Insurance companies chop you off pretty darn quick if you stop paying your premiums."
Movement is also occurring in the corporate world. Root Inc., a publicly traded car insurance company, was founded in 2015 as the first auto insurance provider to use only driving behavior as the basis in determining the price for insurance. The company, which relies on a smartphone app that tracks a user’s driving, offers a credit-score-free process in states where it is able to do so, based on specific state regulations, and recently pledged to be part of an effort to expand to all 50 states by 2025. This option, while promoted as more equitable, has prompted other concerns over accuracy and, crucially, user privacy, given that the technology is, essentially, constantly monitoring a user's motion.
Root CEO Alex Timm said in an interview that driving ability is by far "the most predictive variable" of whether someone should be expensive to insure.
“It’s causal," he said. "All the rest is correlative.”
A handful of other tech companies are laying the groundwork to offer similar products, including a car insurance app called Loop, which is promising “mission-driven car insurance, powered by AI and driven by social good.”
On the D.C. radar
Progress at the federal level has been less robust, but a conversation is underway.
President Joe Biden has repeatedly indicated in recent months that his administration would like to tackle the issue. At a February town hall, Biden said, “If you go ahead and you want to get insurance, and you're in a Black neighborhood, you're going to pay more for the same insurance I'm going to pay for the exact same home."
“Your car, you have never had an accident in your car. You live in a Black neighborhood, you're going to pay a higher premium on your car,” he said. The White House did not respond to questions of whether any action is planned to address the issue.
Lawmakers in Congress, however, have put forth proposals. Sen. Cory Booker, D-N.J., last fall introduced a bill that would prohibit the use of credit scores and other measures deemed discriminatory in pricing auto insurance, as has Tlaib in the House, though none of the bills advanced.
In the meantime, Montenegro is relying on public transportation, which has been curtailed by the pandemic, and, sometimes, rental cars, to get around.
But he said he was hopeful about the national conversation around economic racism and the movement he’s seeing in the state and corporate spheres.
“You think, and maybe it’s naïve, that this is something that happened to past generations and to people of color decades ago. Not to you,” he said. “But the truth is that, now, too, it’s mostly people of color that this is affecting, and it’s so crucial we do something about it.”