Some state lawmakers and regulators are seeking to ban using credit scores to set casualty insurance premiums, responding to racial bias concerns over the underwriting tool that insurers are reluctant to give up.
Insurance regulators in Washington and Oregon are pushing to eliminate credit-based insurance scoring in property-casualty products in the coming year, and legislation has been introduced in several states, including New York and New Jersey, and at the federal level. Insurers say that if regulators, consumer advocates and lawmakers get their way, insurers will lose one of their best and most equitable tools for determining premium rates.
Insurers for decades have used their own credit scoring mechanism as part of the formula for determining how much people pay for auto, homeowners, renters, and other coverage. The industry has found that a better credit score correlates to fewer accidents and other claims. Each insurer uses factors common to traditional FICO scores but with its own tools to establish the credit-based insurance score.
Consumer activists and some regulators say insurers’ credit scoring models result in Black and Latino consumers paying higher premiums, even if they’re less of a risk.
“This is a surrogate for redlining. It’s a more sophisticated form of redlining, but it has the same effect,” Washington Insurance Commissioner Mike Kreidler said in an interview with Bloomberg Law.
The issue is particularly important for car insurance because coverage is mandatory in all but two states—New Hampshire and Virginia.
Kreidler is trying again to get lawmakers in Olympia to pass legislation that would ban the use of credit scoring in premium calculations as the legislature considers other social justice-related bills backed by Washington Gov. Jay Inslee (D). Neighboring Oregon is also considering a ban on the use of credit scoring as part of a broader insurance reform.
Similar legislation has been introduced in New York and New Jersey, although it is unclear how much momentum those bills have.
The issue has also gained attention at the federal level, with Democratic-sponsored bills offered in the House (H.R. 1756 and H.R. 3693) and the Senate (S. 4755).
Insurers argue that using credit-based insurance scores, while counterintuitive, results in lower premiums for most drivers while avoiding potential discriminatory effects that other inputs into their algorithms may allow.
Black and Latino Americans can be harmed by a “legacy of structural racism” that results in fewer economic opportunities and incomplete credit histories, according to Doug Heller, an insurance expert at the Consumer Federation of America. But that isn’t a reflection on a person’s driving record, he said
Heller’s research found that in some instances, people with a DUI conviction—so long as they have a higher credit score—pay lower car insurance rates than people without a DUI record.
Credit “has some of the most profound impacts on the premiums people pay,” Heller said.
Credit scores can be damaged if consumers pay their loans back too early or don’t have credit cards. Credit scores can also be riddled with errors that are difficult to resolve.
The Consumer Financial Protection Bureau has received nearly 600,000 complaints about credit reporting practices on its consumer complaint database, the most of any industry category.
Insurers say that the use of credit-based insurance scores in premium calculations tend to be predictive of future claims.
“Insurance rating doesn’t have to be intuitive, it just has to be predictive,” said Mark Sektnan, the vice president for state government relations at the American Property Casualty Insurance Association.
Insurance companies’ specific rate-setting tools are proprietary, but most use credit-based insurance scores as a part of a broader customer review, Sektnan said. And most have protections in place so that people without a long credit history aren’t penalized, he said.
Studies by state regulators have not necessarily shown widespread discrimination by auto insurers based on credit scores.
A 2016 report from the Vermont Department of Financial Regulation found that insurers operating in the state used credit-based insurance scores to calculate premiums for 60% of the vehicles in the state. Only 16% of drivers ended up paying more because of their credit-based insurance score while 66% paid less, the study found.
It’s unclear how rates broke down on racial lines, however, because insurance companies are barred from collecting racial data on customers and Vermont’s population is around 95% white, according to 2019 U.S. Census data.
But a 2017 study of 2010 data by Arkansas’ insurance regulator had similar findings from a more diverse state. A 2007 Federal Trade Commission study also didn’t find widespread evidence of discrimination.
Sektnan said the insurance industry is proposing that Washington and Oregon regulators instead put in place protections so that temporary credit problems caused by “extraordinary life circumstances,” such as a global pandemic, don’t result in higher rates.
Few Good Options
But there are also questions about what would replace credit-based insurance scores.
Many insurers already use algorithms—computer models that calculate scores—to determine premium rates. Those algorithms frequently rely on proxies for race that can result in unintentional discrimination against communities of color, said Anya Prince, a professor at the University of Iowa School of Law.
“That part is really hard to fix, because it’s the whole nature of systemic problems in our society,” she said.
Sektnan said that some of the measures that consumer advocates would like to see added to premium-setting models, like traffic citations, also come with problems.
The Stanford University Open Policing Project, using data stretching back to 2015, found Black drivers were 20% more likely to be pulled over by police than white drivers.
The ultimate question about how to determine insurance premiums will come down to insurer profitability, unless regulators step in to make discrimination more of a priority, said Kalinda Ukanwa, a professor at the University of Southern California Marshall School of Business.
“There’s a way to do both. The challenge is that there’s got to be an acknowledgment that there’s an issue,” she said