The typical driver can face a wide range of prices when buying auto insurance simply depending on the state of their credit.
The Consumer Federation of America (CFA) pegged prices to that range—$563 to $1,277 for a major insurer’s annual policy—in a new report analyzing the role that drivers’ credit history plays in their premium.
The study concluded that the common use of credit in car insurance pricing is “discriminatory” and encourages “disparate treatment of low- and moderate-income drivers.”
Responses to the study from major trade organizations backed insurers’ use of credit history in auto insurance pricing as a tool supported by data and state regulators, both of which insurers say are evidence that a driver’s credit background is a sound indicator of his or her likelihood of filing claims.
Most states in the U.S. allow car insurers to consider credit history when calculating insurance rates. Insurers, which are regulated at a state level, typically use credit history to determine an “insurance score” that is factored into their final coverage price.
California, Hawaii and Massachusetts prohibit the consideration of credit in insurance scores.
Study: Consideration of Credit Creates ‘Prohibitively High Prices’
For the study, the CFA bought “price data related to credit scores” from Quadrant Information Services, an independent firm that aggregates insurance premium data. It looked at premium data for Allstate and State Farm, the two largest car insurers in the U.S.
To calculate the premiums, the CFA supplied a sample driver profile:
- 30-year-old single female
- Licensed for 14 years
- No coverage lapses
- No accidents, moving violations or license suspensions
- Insuring a 2000 Honda Civic Ex
- 10-mile commute to work, five days a week
- 10,000 miles driven a year
- Coverage levels that meet only the state minimum limits
The following table shows the annual premiums the CFA found when the driver had different credit levels: poor, average and excellent.
|Insurer||Poor Credit||Avg. Credit||Excellent Credit||% from Poor to Excellent|
Price differences were amplified when considering a wider range of credit levels such as “fair,” “below fair” and “worst.”
J. Robert Hunter, the CFA’s insurance director, said that the wide range in prices is biased against those with marks in their credit history, who are more than likely low- or middle-income drivers.
“It is simply not fair to ask the poor to pay more for auto insurance just because they’re poor,” Hunter said in a statement. “Lower-income families tend to have lower credit scores just because they have less discretionary income and more insecure jobs.”
Hunter also told Online Auto Insurance News (OAIN) that, in his conversations with insurers about the use of credit in pricing, his “first question is always, ‘What are you measuring that shows a driver is worse?’”
“They always say, ‘It’s correlated,’” he told OAIN. “But it should be actually correlated to risk … When it comes to credit, the only risk seems to be that the auto premium won’t get paid, but that has nothing to do with crash or claim risk.”
Trade Orgs Say Use of Credit Scoring Helps Drivers
In response to the study, insurance industry trade groups said the CFA is largely overlooking the benefits that credit histories play in auto insurance pricing.
The Property Casualty Insurers Association of America (PCI) said that credit is just one spoke in the comprehensive wheel that is a driver’s risk profile; other spokes include “familiar factors” like the policyholder’s years of driving experience and crash history and the vehicle itself.
In response to the CFA, PCI released a statement the same day saying the study “ignores the fact that responsible people of all incomes benefit through lower rates.”
“While there are those who would seek to keep consumers from receiving lower premiums for having good credit, we believe it is unfair to deny a majority of consumers a lower insurance rate and force them to subsidize those who represent a higher risk,” Alex Hageli, director of personal lines policy for PCI, said in a statement. “CFA’s latest retread ignores the beneficial effects of credit scoring in terms of availability of insurance and lower costs for the majority of policyholders.”
Robert Hartwig, president for the Insurance Information Institute (III), agreed and said that credit history doesn’t always play against people, most of whom have “good credit.”
“A driver’s moderate-to-strong credit history may also offset otherwise negative underwriting factors they might have, such as poor driving record,” he said in a statement.
In fact, Hartwig said, insurers are able to more accurately price policies to create a “rating system that is fair and equitable for all drivers.”
“This is an old issue, settled basically a decade ago,” Hartwig told OAIN. “Numerous entities have conducted studies and all found that stronger credit-based insurance scores were correlated with better loss experience.”
One commonly cited study was issued in 2007 from the Federal Trade Commission.
Consideration of Credit History Drives State-to-State Back-and-Forth
Despite the fact that the vast majority of insurers are allowed to consider credit in insurance pricing, the issue is still contentious for states, most of which allow the practice in some capacity.
This year, lawmakers in Alaska sought to reform the way credit was used, reviving the overall issue of how credit plays into pricing.
“People will say, ‘You don’t know because my credit score is bad that I’m going to crash my car.’ No, we don’t,” Kenton Brine, a PCI vice president, told Alaskan legislators. “We also don’t know if you’re 17 that you’re going to go crash your car. But, statistically, odds are you’re going to go crash your car. So we have to rate policies based on that, based on the probabilities of certain things happening.”
Legislative attempts to eliminate insurers’ consideration of credit in pricing have popped up in several states throughout 2013, from Rhode Island to Texas to Maine, though none of those attempts were successful.
In Texas, a Houston-based senator who pushed a bill nixing the practice called it “arbitrary and inappropriate” because “different companies interpret the data in various ways.” Other senators debating the bill said they had extensive difficulties in erasing marks on their credit history caused by fraud and identity theft.
In the summer of 2012, federal lawmakers also pushed to ban the practice that one representative said has led to “companies penalizing citizens for their credit score.”
CFA Says Current, Previous Studies Address Affordability in Hard Times
Hunter said that the CFA has released several reports on auto insurance affordability this year that focuses on moderate- and low-income drivers that “are a big chunk of America.”
Other reports have touched on how insurers are regulated by states, how much drivers spend on their coverage and methods that insurers use to price policies; each report has drawn rebuke from the insurance industry.
But according to Hunter, revisiting those issues is crucial in a time when the lower-income population is growing. With the annual income of the lowest-earning Americans under $10,000, according to Hunter, many lower-income drivers will find themselves paying more than 10 percent of their income on auto coverage.
According to Hunter, spending that large of a chunk on car insurance “is just impossible for a lot of people.”
“Auto insurance is not voluntary and the problem is that there are more lower-income people and more that are living paycheck to paycheck,” he told OAIN. “It’s not like they have nest eggs lying around for when they get into trouble, so they’re more likely to go without auto insurance. And no access to a vehicle means lower-paying jobs. It means shopping at 7-Eleven instead of Costco. It’s a huge economic drain.”
In its most recent study, the CFA cited a number of studies, including one of its own conducted last September, showing that few Americans believe that insurance scoring is fair.
“Americans reject auto insurer use of credit scores because they don’t think someone who’s had difficulty paying debts should automatically be charged higher auto insurance premiums,” Stephen Brobeck, the CFA’s executive director, said in a statement. “After all, if drivers don’t pay their insurance premiums, insurers are not obligated to pay claims.”
Hartwig responded directly to Brobeck’s statement and said that it misunderstood the process of insurance pricing.
“[It] is incumbent on insurers to price the policy accurately at the point of sale,” Hartwig told OAIN. “Insurers do not want to issue policies that are mispriced and then cancel the policyholder when he/she has a claim.”