A bill introduced to the House of Representatives last week would make it so that the nation’s auto insurance companies are no longer able to take into account a customer’s financial history to help them determine how much to charge for coverage.
Only three states—California, Massachusetts and Hawaii—have placed such restrictions on insurers. In every other state, insurers can look at an applicant’s history of bankruptcies, late payments, etc. to help them assess how much of a risk that prospective policyholder poses.
In some cases, a person’s credit history can have a huge effect on rates. According to sample rate data provided by officials who regulate auto insurance in Nevada, a 30-year-old female with a clean driving record could see rates increase by up to 70 percent if she went from having the best possible credit to having average or neutral credit. If she went from having a neutral record to the worst possible record, she could see rates more than double.
The new bill—introduced by Reps. Hansen Clarke (D-Mich.), John Conyers (D-Mich.) and Bennie Thompson (D-Miss.)—would make it so that such rate fluctuations would be eliminated. They would do so by amending the Fair Credit Reporting Act “to prohibit use of consumer reports and consumer information” in making any decisions about how much to charge a policyholder for coverage or whether to issue him or her coverage in the first place.
“We have to end insurance rating factors that are unfair,” Rep. Clarke says on his website. “Companies penalizing citizens for their credit score and other ‘redlining’ practices must end.”
The bill will face opposition from a huge coverage industry whose widespread use of credit-based insurance scores and loud opposition to statewide bans indicate that they want credit-based rate adjustments to remain an available tool.
A survey of Texas insurers showed that, as early as 2004, 82 percent of the state’s auto insurers’ rate filings used applicant credit info in some capacity. In Arkansas, insurers used credit info in the issuing or renewing of some 2.1 million policies in 2010. And the latest survey from Missouri regulators showed that all of the state’s 10 largest auto insurers used credit in determining whether to insure applicants and how much to charge them.
Coverage providers use financial info to help assess risk because such info has proved to be a good indication of how many claims a policyholder will file and how much those claims will cost the company.
A 2007 analysis of credit-based insurance scoring by the Federal Trade Commission (FTC) confirmed that trend. The FTC analysis looked at data for about 1.4 million annual policies and found that, for example, insurers paid nearly twice as much for property damage claims for customers with the lowest credit scores compared with customers with the highest scores.
“Credit-based insurance scores are effective predictors of risk under automobile policies. They are predictive of the number of claims consumers file and the total cost of those claims,” the FTC wrote. “The use of scores is therefore likely to make the price of insurance better match the risk of loss posed by the consumer.”
With conclusions like that to go against, the new bill has a tough road ahead of it.
But the use of credit in pricing coverage is not without its detractors. Plenty of groups allege that insurers’ use of credit information hurts lower-income people—who are more likely to have credit issues—the most. They argue that credit-based rating models make it so that the drivers who are least able to afford higher prices are the ones who get inflated premiums.
Few state lawmakers fighting credit scoring have won their battles. Which side will win on the federal stage remains to be seen.