Now is the time to ban credit scoring
For more than two decades, insurance companies have used your credit score to determine how much you pay for auto, homeowner, renters and other types of insurance. They file complex rating models with insurance commissioners across the country, claiming these scores predict who will file claims in the future. After all, insurance is about avoiding risk.
But what does your credit information have to do with how you drive your car or maintain your property? Shouldn’t your insurance premium be based on these factors or on how many claims you’ve filed and the cost of those claims?
What would you think if someone with a DWI and good credit pays less than you even if you have an excellent driving record and less-than-perfect credit? That is what’s happening today.
If your insurance premium has gone up due to a credit score, we want to hear from you.
Credit scoring in insurance is inherently unfair and especially now, as people struggle with the impact of the coronavirus pandemic. We know that people with lower incomes and communities of color are hardest hit and many have lower credit scores.
The primary reasons people encounter financial difficulties are often outside of their control, including unemployment, natural disasters and medical expenses. And the impact of these events can continue for generations.
Of the more than 1.3 million people who have filed for unemployment in Washington state since March 8, 5% are Black and 11% are Hispanic.
Insurance Commissioner Mike Kreidler has called for a ban on credit scoring since he first took office in 2001. Insurance companies claim that their scoring models are color-blind, since they never ask about consumers’ race or ethnicity. But Kreidler believes the practice has a disparate impact on people with lower incomes and communities of color. A 2017 report from ProPublica found:
Despite laws in almost every state banning discriminatory rate-setting, some minority neighborhoods pay higher auto insurance premiums than do white areas with similar payouts on claims. This disparity may amount to a subtler form of redlining, a term that traditionally refers to denial of services or products to minority areas. And, since minorities tend to lag behind whites in income, they may be hard-pressed to afford the higher payments.
And a 2016 report from the National Consumer Law Center revealed that more than 50% of white households have a FICO credit score above 700, compared with only 21% of Black households. It found that 33% of Black households have such insufficient credit history that they don’t generate a score, compared to 18% of white households. It also highlights how credit scoring can perpetuate systemic racism:
Jesse Jones with KIRO 7 reported on race, credit scoring, and the most expensive neighborhood for car insurance in Washington and found a correlation:
In light of recent racial tensions across the country, many major corporations called for racial justice and an end to systemic racism. The insurance industry joined this call and voiced overwhelming support for action to promote racial and economic justice.
Commissioner Kreidler reached out to the CEOs of the insurers and asked them to join him in his call to ban credit scoring. To date, none have responded.
Instead, the American Property Casualty Insurance Association, the National Association of Mutual Insurance Companies and the Northwest Insurance Council continue to oppose Kreidler’s proposal. Their arguments are tone-deaf to the financial struggles people are facing during an economic crisis and do not address the historic racial inequities embedded in our credit system.
Today, we know that low-income families and communities of color are especially hard hit by the coronavirus pandemic.
A recent report from Washington’s Department of Health shows that COVID-19 cases among Hispanics, Native Hawaiian, and Pacific Islanders are nine times higher than whites and three times higher for Blacks and American Indian and Alaska Native people.
These communities are bearing the financial and health impacts of COVID-19 more acutely.
Chi Chi Wu of the National Consumer Law Center points out, “It’s a lot harder to keep paying the bills during a rough financial patch, such as the current COVID economic crisis, when Black families have one-tenth of the assets of white families ($17,150 in assets for Black families versus $171,000 for white families).
Insurance companies have many other factors they can consider when setting rates. They successfully sold insurance for more than two centuries before credit scoring came along. They can do so again.
We expect to hear that banning credit scoring will remove the insurers’ ability to give discounts to their customers. And others will argue that people who are responsible with their money should pay lower rates. But being economically disadvantaged does not mean people are less responsible — in many cases, we know they have less access to resources and opportunities.
Without credit scoring, the amount of premium insurers collect will remain largely the same. There will likely be a shift in who pays what, but it won’t take long for insurers to adapt and find new, less discriminatory methods for attracting customers.
Just look at the experience of California. With the passage of proposition 103 in 1989, insurers were required to rely mostly on driving-related factors such as driving record and miles driven to set premium. Between 1989–2015, the average liability premium in CA decreased by 5.7%. California drivers saved $154 billion, or $6 billion a year. In the same time period, the national average liability premium increased 58.7%.
Now, as we struggle to overcome the worst health and economic crisis of our generation and we come head-to-head with the stark reality of the systemic racial injustice in our country, this small step is the least we can do. Banning credit scoring is long overdue.
