By Graeme Reynolds
Findings from our analysis of the links between the price of motor insurance and local area ethnicity in England and Wales.
The consumer group Citizens Advice has raised concerns that individuals from minority ethnic backgrounds are paying £307 on average more for their motor insurance.
We committed to examining the concerns raised by Citizens Advice and looking in more detail at whether specific customer groups pay more, including those from minority ethnic backgrounds. As a regulator, we have access to data which is representative of the wider market and detailed about policies, including risk measures.
Our analysis drew upon data from 6 million policies, covering over half the UK market by insurer and including both predicted and actual claims costs. We merged our data with ethnicity data from the Office of National Statistics for local areas covering 1,000–3,000 residents.
Premiums reflect different risks
Risk is fundamental to insurers’ business models and how prices are set. This includes looking at a range of data points like driver age, experience, and claims history. Insurers don’t collect data on individuals’ ethnicity and don’t price directly based on it.
The data used can also include geographic location, where factors like high traffic, theft, and vandalism matter. To measure that risk, we looked at insurers’ expected costs of claims in an area. Our analysis shows that the relative risks in a geographical area account for the overwhelming difference in prices between those areas with high and low numbers of residents from minority ethnic backgrounds.
We recognise, however, that does leave a difference in price, albeit a small one, that can’t be attributed just to the claims insurers expect to pay. In Luton, which had one of the largest residual differences and where 43% of residents are from minority ethnic backgrounds, that accounted for £28 on a total premium of £627, rather than the almost £300 difference we find when not adjusting for risk.
So why does this ‘unexplained’ difference occur?
The short answer is we don’t – and probably can’t – know.
For our data scientists, one of the challenges you learn to live with is that no matter how good your data and model are, you are unlikely ever to completely account for or explain every pound of price difference.
That is especially true in something like insurance when there are many variables and different risk appetites used to set price. So, while insurers’ expected claims costs is a pretty good proxy for risk in an area, it’s only ever a best estimate. There may be other risk measures, different risk weightings or behavioural factors being used that aren’t in our model. For example, motoring convictions may not be included in expected claims cost modelling.
Our analysis also doesn’t account for other costs or revenue lines, such as how insurers allocate their fixed costs. And small differences in how accurate insurers’ risk estimates are may have an effect, with uncertainty potentially leading to higher prices.
Next steps
We think this is the most comprehensive look at the data to help us understand what is happening – even if it can’t give us a perfect picture.
That data suggests that price differences are overwhelmingly explained by the differences in risk between different areas.
So, aiming to reduce higher motor insurance costs in areas with more residents from minority ethnic backgrounds will ultimately come down to addressing external cost pressures and overall claims costs.
This needs action from multiple stakeholders. As part of our work with the government motor insurance taskforce, we identified several areas where industry, government and others can act to manage or reduce claims cost so all consumers can benefit through lower premiums. We welcome the latest proposals published by the taskforce in December.
We also welcome proposals of the Financial Inclusion strategyLink is external to tackle access to insurance challenges, including the cost of motor insurance.
We know the cost of motor premiums has started to fall, and we continue to take steps to ensure good outcomes for consumers – like securing £200 million in compensation for customers who were offered less money than their written-off or stolen vehicle was worth.
A well-functioning retail insurance market helps consumers navigate their financial lives, provides peace of mind and supports growth by building resilience to shocks.
- Graeme Reynolds, Director of Competition and Interim Director of Insurance
