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Redlining: A Thin Line between Profits and Discrimination

Written by Todd Clay. Posted in Definitions Last Updated: 08/31/2011

Profitability not discrimination is the driving force behind increased premium rates in certain geographical areas.

Hand Drawing A Red Insurance Line

Drawing red lines on maps around minority neighborhoods that they would not insure is a dark part of insurance history.

Insurance redlining is the act of increasing insurance premiums based on the information that the client lives in a particular neighborhood. Insurance companies contend that they have to charge higher premiums for certain areas because the chance of a claim being filed for theft or other damage while a vehicle is in that area is higher.

Because most of these neighborhoods with the higher rates are home to a higher percentage of minorities, the insurance companies have to walk that thin line between making money and practicing discrimination.

Illegal form of discrimination

Redlining is a form of illegal discrimination that was used in the past by insurance companies and is still alleged to go on today. The word “redlining” came from red lines that were drawn on a map around neighborhoods (predominately minority populated) that were not eligible for home loans.

This “redlining” practice carried into the field of insurance on the back of the home loan decisions. Insurance companies would also outline neighborhoods on their maps that they refused to insure. These refusals were based primarily on the fact that that the neighborhoods were populated by minorities.

Insurance companies would even ask a person’s race on an application and would deny the application solely on the answer that was given.

Accusation of Redlining Today

Even though the government has passed laws that prohibit redlining, people charge that insurance companies are still participating in the act. While the insurance companies are no longer denying insurance solely based on race or location in a minority neighborhood, the accusations are targeted at the premiums being charged.

Insurance companies charge more for certain neighborhoods that statistically have a higher chance of an incident happening that would result in a reportable claim. Because these neighborhoods that are charged higher premiums are predominately minority neighborhoods, people claim the act of redlining is at work.

The Insurance Company’s Side

Insurance companies are not purposely trying to engage in illegal discrimination. However, insurance companies are in the business to make a profit and not to be a charity.

This means that their business focus has to be on bringing in more insurance premium than they pay out in claims each year. To do this they charge people more who have a higher risk of having a claim to offset the amount of the claim they are most likely going to see filed.

Unfortunately, just like drivers there are certain neighborhoods that have a higher risk of having a car stolen or being hit. If you live in one of these neighborhoods your insurance premium will be higher because of the higher chance of filing a claim.

If an insurance company does not charge enough premium according to the risk they are taking on when they insure someone, they will go out of business. Leaving everyone that has paid them premium without an insurance company to pay any claims that they may have in the future.

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Todd Clay

Todd Clay is a former insurance agent with the largest insurance company in the United States. He earned his Bachelor’s from the University of Texas. He's worked in several fields but has specialized in insurance, financial-related information, and technology. He blogs at Car Insurance Guidebook. Connect with Tood on Google+

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