Address and Correct Discriminatory Practices in Auto Insurance Pricing

 

The purpose of this bill is to eliminate discriminatory pricing in auto insurance policies based on residential ZIP

codes, where pricing models disproportionately affect lower income and minority communities despite individual driving

records and risk profiles

 

Auto insurance premiums in the U.S. are significantly influenced by the ZIP code of a driver’s residence. According to a

2021 report from the Consumer Federation of America, drivers in high risk ZIP codes (areas with higher rates of

accidents or crime) are often charged up to 80% more for insurance than drivers in safer, more affluent areas despite

having similar vehicles and driving records.

 

 

"Auto Insurance, shall be defined as" Any form of insurance coverage purchased to protect a driver from financial loss

resulting from accidents, theft, or damage to their vehicle, as well as injuries to others involved in a crash.

"Premium, shall be defined as" The amount of money paid to an insurance company for coverage under an auto insurance

policy, typically paid on a monthly, quarterly, or annual basis.

"ZIP Code-Based Pricing": A practice where insurance premiums are influenced or determined by the ZIP code of the

policyholder's residence. This often reflects factors like local crime rates, accident statistics, and the average

income level of the area.

"Risk Assessment": The process used by insurance companies to evaluate the likelihood of a claim being made based on a

variety of factors, including the policyholder’s driving history, vehicle type, and geographic location.

"Individual Driving Behavior": A driver’s personal record of accidents, claims, traffic violations, and other behavior

that directly affects the risk profile of the driver, regardless of the driver’s residential area.

"Geographic Pricing": The practice of using geographical factors, such as ZIP codes, to determine a driver’s insurance

premiums, rather than focusing solely on personal risk factors or driving behavior.

"Discriminatory Pricing": The practice of charging higher insurance premiums to individuals based on factors that are

not directly related to their personal driving risk, such as race, ethnicity, or residential ZIP code. This practice

disproportionately affects lower-income and minority communities.

"Minority Communities": Populations that are historically underrepresented in terms of economic wealth or political

power, including but not limited to Black, Latino, Asian, and Indigenous groups, as well as other communities that face

systemic inequalities.

"Low-Income Communities": Residential areas with a higher-than-average percentage of households below the federal

poverty line, often associated with limited access to financial resources, education, and healthcare.

"Affluent Areas": Residential areas characterized by a higher average income level, where residents are more likely to

have access to resources, better infrastructure, and lower rates of crime.

"Insurance Provider": Any company, corporation, or entity that offers auto insurance coverage to individuals or

organizations.

 

 

Establishment of a Fair Insurance Oversight Fund (FIOF)

A new fund shall be established, called the Fair Insurance Oversight Fund (FIOF), to support the administration and

enforcement of the provisions of this Act. The fund will be used to:

Support government oversight of insurance companies' adherence to the new guidelines.

Provide financial assistance to affected policyholders who may be entitled to refunds or adjustments due to prior

discriminatory pricing.

Conduct studies and audits of insurance companies' pricing models and ensure they are in compliance with the law.

Provide education and resources to consumers about fair pricing models and their rights.

Funding Sources

The FIOF will be funded by:

Insurance Industry Fees: All licensed insurance companies will contribute 0.5% of their total annual revenue from auto

insurance premiums to the FIOF, based on their market share. These fees will be assessed annually and will be used to

cover the cost of enforcement and consumer restitution.

Penalties for Non-Compliance: Any insurer found guilty of violating the terms of this Act, including engaging in ZIP

code-based pricing or failing to provide transparency in rate-setting, will be required to pay a penalty into the FIOF.

Penalties will range from $100,000 to $5 million depending on the severity of the violation and the number of affected

consumers.

Federal Support: In the event that state funding is insufficient, federal grants or appropriations may be sought to

support the implementation of the Act and ensure that the program is effective nationwide.

Fund Allocation

The FIOF shall be managed by the Federal Insurance Regulatory Authority (FIRA), and the funds will be allocated as

follows:

50% will be allocated for consumer restitution, providing refunds or premium reductions for policyholders who were

subjected to discriminatory pricing.

30% will fund research, audits, and enforcement of insurance companies' compliance with the new regulations.

20% will be designated for public outreach and education, including workshops, informational materials, and a toll-free

hotline to assist consumers in understanding their rights under the new law.

 

 

Violations and Penalties

Insurance companies found to be in violation of this Act shall be subject to the following penalties:

First Offense: A fine of up to $1 million, with mandatory restitution to all affected consumers within the last 12

months. The restitution shall include the difference in premiums paid as a result of discriminatory pricing based on ZIP

code, plus interest.

Second Offense: A fine of up to $5 million, and the company must also undergo a mandatory audit by the Federal Insurance

Regulatory Authority (FIRA) to ensure compliance. A public report detailing the violations and corrections must be

submitted.

Third or Subsequent Offense: Fines of up to $10 million, suspension of operations in any state found to be in violation,

and potential revocation of the company's license to sell auto insurance in that state.

Enforcement Authority

The Federal Insurance Regulatory Authority (FIRA) shall be responsible for overseeing compliance with this Act. FIRA

will have the authority to:

Conduct random audits of insurance companies' pricing models and review their rate-setting practices.

Investigate consumer complaints and initiate class action lawsuits on behalf of affected policyholders.

Impose fines and sanctions as necessary to ensure adherence to the law.

Work with state insurance regulators to ensure that state laws are aligned with the provisions of this Act.

Consumer Rights and Legal Actions

Affected consumers who believe they have been charged unfair premiums based on ZIP code pricing may file complaints with

FIRA, which will investigate and mediate the case. If FIRA does not resolve the issue within 60 days, consumers have the

right to sue the insurance company in federal court for restitution and damages.

 

 

This Act shall take effect on January 1, 2026, and all insurance companies must comply with the new regulations no later

than July 1, 2026.

Auto insurance premiums in the U.S. are significantly influenced by the ZIP code of a driver’s residence. According to a

2021 report from the Consumer Federation of America, drivers in high risk ZIP codes (areas with higher rates of

accidents or crime) are often charged up to 80% more for insurance than drivers in safer, more affluent areas despite

having similar vehicles and driving records. In California, up to 30% of drivers have been found to pay higher premiums

due to their residential ZIP code, as detailed in a 2020 California Department of Insurance study. For example, a safe

driver living in a ZIP code with higher crime rates could pay hundreds of dollars more per year for car insurance than a

comparable driver in a safer area, even though they have identical driving histories. The National Association of

Insurance Commissioners (NAIC) reports that rate-setting based on geography unfairly penalizes drivers who live in areas

with higher poverty or historically higher accident rates, rather than basing rates purely on individual driving

behavior and vehicle types.In low-income urban areas, it is common for drivers to be charged higher premiums, even

though lower-income households are often forced to drive older cars, which could be less valuable and cheaper to insure.

Yet, these drivers are often penalized with higher costs due to the ZIP code associated with their address. According to

the Consumer Financial Protection Bureau (CFPB), low-income consumers pay up to 60% more in insurance premiums than

individuals living in wealthier areas, even when they have equivalent or better driving records. This discrepancy is

partly due to geographic pricing models. And in a 2019 study by the National Bureau of Economic Research found that

drivers living in predominantly Black and Latino neighborhoods paid, on average, $300 more per year for the same

coverage than those living in predominantly White neighborhoods, despite having similar driving habits and vehicle

types.

In conclusion the elimination of ZIP code-based pricing will ensure fairer and more equitable pricing models in the auto

insurance market, which will lead to lower premiums for drivers in historically disadvantaged areas. Drivers will also

see a reduction in premiums based on their individual driving habits, making insurance more affordable for responsible

drivers, regardless of where they live. And in the end Insurance companies will adopt more sophisticated risk assessment

models, which will improve their accuracy and fairness in determining premiums.