(Bloomberg Businessweek) -- The ubiquitous three-number credit score is a powerful force in U.S. finance—and everyday life. Banks use scores to determine who gets a loan, landlords rely on them to choose who rents an apartment, and auto insurers in some states depend on them to decide who’s riskier. Now, the insurance industry and Washington state regulators are at odds over whether the scores are a fair measure to figure out who’s a good driver.
Mike Kreidler, a Democrat who is the state’s elected insurance commissioner, has been pushing for a rule to temporarily ban the use of credit scores in setting auto rates, as well as for homeowner and renters’ coverage. He says he’s aiming to minimize the impact of the economic disruptions brought on by Covid, but his concern about the use of the scores is broader. Kreidler says they tell an insurer more about whether the consumer is rich—and potentially a more lucrative customer who might buy more coverage—or poor, which unfairly disadvantages consumers who are already financially stretched and disproportionately hurts people of color. “It is not a predictor to how you drive a car, it is not a predictor to how you maintain your home,” he says. “Rich people don’t file claims as often as people who are poor. It doesn’t mean that they’re better drivers.”
The use of credit scores in car insurance isn’t new, but the racial protests of 2020 have cast a spotlight on how large institutions and systems can perpetuate inequality, even when rules don’t seem discriminatory on their face. Before the advent of telematics, devices in cars that help insurers track a customer’s driving, insurers had to cobble together measures to try and figure out who was a good risk and who was a bad one. Companies say there’s a reasonable correlation between a good credit score and a good driver, making it a useful factor to analyze. In 2007, the Federal Trade Commission produced a report saying credit scores were effective predictors of claims risk, but it also acknowledged it couldn’t establish a causal link between the two.
The insurance industry argues that consumers should want predictive factors to be used in setting auto rates, and that without considering credit, some drivers with high scores will end up paying higher prices. Mark Sektnan, vice president for state government relations at the American Property Casualty Insurance Association, says the industry has supported measures to make sure that consumers facing undue hardships won’t be hurt, such as making sure that customers hit by a big life event like divorce won’t see that reflected in pricing. “The industry is constantly evaluating tools to make sure they’re accurate, and they’re very conscious of the social implications,” Sektnan says.
The Consumer Federation of America said in a report earlier this year that premium data for Washington drivers shows that safe drivers who have poor credit scores pay 79% more on average than a driver with excellent credit and a similar record. “For every discount that was handed out under credit scoring to a good driver, there was a good driver who was paying a tremendous penalty, not because of their driving record but because of their financial record, ” says Doug Heller, an insurance expert with CFA.
California already prohibits insurers from using credit scores. Texas, the second-most populous state, limits them. Insurers there can’t refuse to insure a customer if their credit score was harmed by a temporary loss of employment or other major life event, and they have to make an exception if a person’s score was hurt because of identity theft or the loss of a family member. Colorado recently enacted a measure requiring insurers to justify the use of some data, such as credit scores. Colorado Insurance Commissioner Michael Conway says the new rule would encourage more scrutiny of the data but isn’t an immediate ban on its use. “It is fully our expectation that we’re going to find issues as we start to do this stress testing,” Conway says. But he says he also expects “we’ll be able to work through the vast majority of those issues.”
In the spring of 2021, Washington state’s Kreidler issued an emergency ban on the use of credit scores for insurance. It was overturned in October by a judge who said Kreidler hadn’t shown the issue was urgent enough to bypass the normal rule-making process. Now Kreidler is trying to get a three-year ban through the state watchdog’s regular procedure.
Drivers, insurance agents, consumer advocates, and insurance industry groups packed a virtual public hearing on the issue in November. Some drivers complained that they had already seen an increase in their rates because of the emergency action, and said they were losing the advantage of a high score that they had worked hard to get. In a statement in September, Kreidler said that insurers were sometimes telling customers that a premium increase was entirely a result of the new rule, but that often other factors were at work. After the hearing, he sent a letter to insurers asking them to provide details about how the loss of credit scoring has affected customers.
This is all happening at a time when the auto insurance industry is experiencing a lot of flux in its pricing models. Auto insurers benefited at first when the Covid-19 pandemic swept through the U.S. Shutdowns across the country led to fewer, albeit sometimes more severe, accidents. Some of the big publicly traded auto insurers have seen losses creep up in recent quarters as drivers got back on the roads and the cost of replacement car parts rose amid supply chain bottlenecks and increasing inflation.
CFA’s Heller argues that what matters more is the societal impact of using credit scores. “If the data showed that a new drug lowers cholesterol but it also causes cancer, we don’t use the drug,” he says. “And structural racism is a societal cancer, so even if credit scoring has a correlation to insurance, its side effects are unacceptable.”
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