Analysis of 18,000 car insurance quotes from people seeking debt advice from Citizens Advice in 2021 found that on average, people of colour paid £250 more a year than white people.

But the research delved further into eight postcodes, split between areas where there is a high white population to areas where there is a high proportion of ethnic minorities.

Citizen’s Advice found that in postcodes where over 50% of the population are ethnic minorities (based on 2011 census data), they paid at least £280 more for their car insurance. This figure was even higher at £600 in some areas, rising to £950 in some other locations with a higher proportion of people of colour.

In postcodes with largely white populations, the lowest average quote received was £542. This rose in postcodes with around two thirds people of colour, where the lowest average quote offered was £837. In postcodes with more than 85% people of colour the lowest average quote was £1,166; 115% higher than in largely white postcodes.

It ‘stress-tested’ the postcodes to see if common risk factors such as crime rate, deprivation, road traffic accidents and population density could account for the price difference, but they didn’t.

It used police data to calculate the three-year average crime rate for each postcode, and categorised them into comparatively high, medium and low crime postcodes. As expected, postcodes in the relatively low crime group received lower average quotes compared to postcodes in the medium and high crime groups.

“But when we dig deeper the results aren’t as simple. The average quote for the postcodes with largely white populations were roughly equal, regardless of the crime rate in the area. In fact, one of the lowest quotes we received was for a postcode with a largely white population, with the highest crime rate across the
whole sample,” it noted.

Data discrimination

It carried out 649 mystery shops for fully comprehensive cover for a Vauxhall Corsa and Ford Focus at Admiral, Direct Line and LV (all direct rather than through comparison sites).

It used six personas across eight postcodes, including common names among people from different ethnic backgrounds – Black African (Ghanaian) Kwame Owusu and Anthony Olukayude, South Asian (Indian) Rajesh Singh and Sukjunder Singh, and White (British) David Taylor and Andrew Clarke.

The majority of the personal details submitted online, including car, job and no claims history, remained the same.

But the average quote in a low-crime area where most of the population were people of colour, was more than double that in a largely white area with a much higher crime rate.

As an example, its mystery shopping looked at two postcodes in Bristol and found the area with a population of 44% black people and 18% south Asian people, received an average quote of over £280 more than a postcode less than two miles away, where the population is 87% white. This is despite the white area having a higher relative crime rate.

“Our results are concerning. Our mystery shopping did not find any statistically significant differences in prices paid by customers with different names. But we did find significant price differences between customers living in different areas,” the report stated.

While the charity said that everyone who lives in the spotlight postcodes pays the higher price – regardless of their ethnicity – if the trend were replicated across the country, ethnic minorities would be 13 times more likely to pay a higher price than white people.

It estimates this group is paying at least £213m a year more on their car insurance as a result.

“We’re concerned that this suggests that areas with large communities of colour may be identified as more risky, even when objective risk factors are controlled. We need to understand what is driving the ethnicity penalty if differences in price cannot be explained by common risk factors”, the report read.

Ethnicity penalty

Citizens Advice revealed that people of colour spend an average of £887 per year on car insurance, compared to £633 spent by white people. It said this is significant particularly in the context of people it helps with debt as they have an average annual income of £16,200, compared to a national average of £29,000.

“For the people of colour we help with debt, this could mean spending 5% of their average annual income on car insurance.”

It added: “In the context of the coronavirus pandemic and the rising cost of living, it seems that many of the households paying the ethnicity penalty could be those least able to afford it. In summer 2021, 42% of people of colour reported that they had lost income as a result of the pandemic, compared to 26% of white
people.”

Citizens Advice is calling on the regulator, the Financial Conduct Authority (FCA) to ensure no one is discriminated against based on race, ethnicity or national origin, resulting in an ethnicity penalty in the insurance market.

It said the FCA has a responsibility to ensure customers are treated fairly and in 2018, it warned insurers that using data linked to protected characteristics could discriminate against customers.

It also wants the FCA to set out how insurance firms must prove they abide by the Equality Act 2010. This would require insurance firms to audit and account for their pricing decisions. If the firm can’t explain the ethnicity pricing differences, the charity wants to see the FCA take enforcement action.

Insurers don’t collect ethnicity data. But Citizens Advice fears there’s a real risk that other data can be used as a proxy for the ethnicity of customers. This data is processed through complex algorithms which are hard to examine, making it difficult to track if some groups are paying more than others. This could be behind the ethnicity penalty, it suggested.

The report added: “To understand what is driving these outcomes, it is important to reflect on the broader context in which decisions about insurance pricing are made. Insurance companies operate in the context of systemic racism, which seriously impacts the lives of people of colour in the UK. Systemic racism in areas like
education, employment and housing has created structural inequalities for people of colour, which are reflected in many of the rating factors used by insurers to calculate risk. While individual rating factors may be considered
legitimate, taken together they could contribute to the poorer outcomes people of colour experience.”

‘No one should pay more because of a protected characteristic’

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.”

James Dalton, Association of British Insurers director, general insurance policy, 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 of a car insurance policy which, as Citizens Advice recognise, should not be looked at in isolation but ethnicity is not one of them. As the report says, the research ‘was exploratory, and therefore cannot definitively identify what is driving this trend.

“However, we recognise this report raises an important public policy debate. Like everyone, our sector has a role to play in addressing inequalities that exist in wider society and it’s an issue that we will continue to engage on constructively as an industry.”