The charity said there was a “shocking trend” for drivers from ethnic minority backgrounds to pay more regardless of other factors such as gender, age or income and urged the insurance watchdog to investigate the issue.
As part of a year-long investigation the charity examined 18,000 car insurance costs reported to it by people across England and Wales in 2021 seeking debt advice.
It found that, on average, people from ethnic minority backgrounds paid £250 a year more than white people – regardless of their gender, age and income.
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It also carried out mystery shopper exercises which found a difference of more than £280 in some cases.
The Association of British Insurers (ABI) insisted that its members never used ethnicity as a factor when setting premium costs but said that the Citizens Advice report raised an “important public policy debate”.
The charity carried out 649 mystery shops in England using six personas across eight postcodes, with details including car, job and no claims history remaining the same in every case.
It found that in postcodes where more than half the population are from ethnic minority backgrounds - based on census data - there was what it called an “ethnicity penalty” of at least £280 a year.
The charity claimed that local risk factors such as the crime rate, deprivation, road traffic accidents and population density could not account for the price differences.
It said that while insurers do not actively collect ethnicity data, it was worried that the volume of other data available means there is a risk that data can be used as a proxy for ethnicity. It added that the complexity of the algorithms used to calculate premiums made it hard to track if some groups were paying more than others.
It has now called on the Financial Conduct Authority to ensure insurers are treating all customers equally. Dame 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.”
An FCA spokesperson said the report raised “challenging questions” for insurers. They added: “Firms must not use data in their pricing that could lead to discrimination based on protected characteristics, such as ethnicity, and we have acted where we’ve had concerns, including writing to all insurers setting out our expectations.
“Firms must also be able to assure themselves, and us, that any risk factors they include also do not result in discrimination.”
James Dalton, the ABI’s director of general insurance policy, said all insurers abided by the Equality Act and never used ethnicity as a factor when setting prices.
He commented: “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.”