Credit scoring is unfair, but insurers want you to prove it

A bill to ban insurance companies from using your credit information to determine how much you pay for auto and homeowners insurance is working its way through Washington’s Legislature. Insurers have argued that credit information is a good predictor of the likelihood you’ll file a claim in the future and there’s nothing unfair about it. They’re just assessing risk and isn’t that what insurance is all about?

Yes and no.

Scores of 690 or above are considered good credit. www.nerdwallet.com

Insurance companies can use any factor to set rates as long as they can actuarially justify its use and it doesn’t discriminate against protected classes of people. While insurers do not explicitly ask people about their income or race when selling them auto or homeowners insurance, Insurance Commissioner Kreidler believes that credit scoring is unfair and disproportionately impacts people with low incomes and communities of color.

A recent Consumer Federation of America report shows that in Washington state people with clean driving records but poor credit scores pay nearly 80% more than a good driver with a high credit score.

So a person driving the same car, the same number of miles, with no accidents or tickets can pay 80% more on average simply because of their credit score. And the insurance industry continues to claim this is fair.

At the same time they argue credit scoring is fair, they’re pushing an alternative proposal (House Bill 1351) from the industry-connected National Conference of Insurance Legislators (NCOIL) that has been adopted in several states. It’s referred to as the “Extraordinary Life Circumstances” bill. Strip away all of the legal language and you find the basic premise: Credit scoring may be unfair in certain circumstances, but it’s up to you, the consumer, to prove you are worthy of premium relief.

On top of that, the proposal would allow the insurance company to decide:

  • Who is worthy of relief.
  • How much relief you should get — if any.
  • And how long your relief should last.

And the insurance commissioner has no authority over the insurers’ decisions.

The industry makes no promises to let you know that relief is possible. Your insurance company is the prosecutor, judge and jury.

If you’re a consumer who hits a bump in the road and sees your credit dip after years of financial worthiness, you might get a pass this time. But if you’re someone who never used credit or who has not had access to the same generational wealth or who has been locked out of the prime financial institutions, and your score has always suffered because of it, you’ll have a harder case to make.

And that’s if you even know you have a right to ask. When presented with the model law this summer, Kreidler’s office asked the industry for data about how companies inform consumers about this option, how many people are granted a waiver, and for demographic information.

They didn’t have any.

But we know how often consumers complain. Last year, we received almost 7,000 complaints about their insurance and we recovered about $46 million on behalf of consumers. We’re well aware of how often the insurance industry’s protections can let consumers down.

But don’t take just our word on just how flimsy the “extraordinary life circumstances” protection is. Consumers Union identified the weaknesses in 2013:

“Given that the majority of consumers are unaware that insurers use credit information, it is highly unlikely that consumers will know about the existence of an exceptional life events exemption in the states that have adopted one. It is also not helpful that the exemption must be invoked on an individual basis, even when there is an identifiable group of individuals who have been impacted by a single event. These barriers mean that consumers who qualify for an exemption may not exercise the option when needed, making the benefit of an extraordinary life event exemption illusory.”

For more than half a century, Washington consumers have been confident that the premium their insurer charged them is correct. They couldn’t negotiate a better deal by asking nicely or by knowing a secret handshake. They could change their coverage or deductible to get a different premium, but the rate for their specific coverage stays the same. Under the bill now proposed in the Legislature, you won’t get the same guarantee.

The burden is — and should remain — on your insurance company to make sure it applies rates fairly. Making rating contingent on a consumer’s appeal is unfair. Of course insurers could automate the appeal process into their rating, but they won’t. Because when you dig deep enough, everyone with a low credit score has a story to tell and there’s no fair way of saying which life stories should count.

So those pushing this bill believe that credit scoring can be unfair in certain circumstances and to certain people, but not to everyone. And it’s up to you to make the case to an industry that counts its profits in the billions every year.

The bill will be heard in the House Committee on Consumer Protection on Monday, Feb. 1.

The time has come to create a better balance on behalf of consumers. Banning the use of credit scoring for insurance achieves this goal. And it just makes more sense.

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WA State Office of the Insurance Commissioner

WA State Office of the Insurance Commissioner

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Washington state Insurance Commissioner Mike Kreidler regulates the insurance industry and protects insurance consumers.