Iowa Proposes Auto Insurance Credit Score Reform Bill
New legislative efforts in the Iowa House of Representatives aim to reform the use of credit scores in the auto insurance underwriting process. House File 2259 seeks to prevent insurers from considering credit scores when underwriting or rating auto insurance policies, including those for snowmobiles and recreational vehicles. This proposed change could significantly impact the current premium penalty structure for drivers with less favorable credit scores.
Currently, Iowa's regulations allow the use of credit scores in underwriting various personal insurance policies, as long as these scores are updated within a 90-day timeframe. However, insurers in Iowa cannot rely solely on credit information to deny, cancel, or refuse renewals without additional risk assessments. Today, individuals with poor credit in Iowa face premiums approximately 140% higher than those with excellent credit scores, a disparity notably above the national average.
According to statistical data from Bankrate, drivers with poor credit pay about 105% more for full coverage nationwide. Additionally, The Zebra's analysis highlights a significant annual cost difference of $1,421 for those with poor credit compared to peers with excellent credit and similar driving records.
State Regulations on Credit Score Use
Should this bill pass, Iowa would join several states that have prohibited or limited the use of credit scores for insurance purposes. The National Association of Insurance Commissioners reports that California, Hawaii, Massachusetts, and Michigan fully ban such practices, with Michigan's prohibition established in 2020 being the most recent.
Other states, like Maryland, Oregon, and Utah, impose partial restrictions. For example, Maryland permits credit scores for establishing initial rates but forbids policy cancellations based on credit history, akin to regulations in Oregon. Utah allows credit score usage solely for offering discounts rather than increasing premiums.
Industry Perspectives and Consumer Advocacy
The insurance industry and stakeholders present varied perspectives on this issue. Insurance firms argue, as noted by the National Association of Insurance Commissioners, that credit-based scoring aids in accurately assessing risk profiles. Conversely, consumer advocacy groups argue this methodology disproportionately impacts lower-income and minority groups. New York Assemblymember Pamela Hunter, who introduced similar legislation, stated, "While many carriers might argue that there is a correlation between credit scores and driving history, it is just that, correlation and not causation."
In New Mexico, legislators proposed similar legislation, highlighting disparities revealed by the Consumer Federation of America. The report showed notable differences in premium costs based solely on credit scores, where drivers with equivalent driving histories faced different rates based on their credit. The National Association of Insurance Commissioners affirms that around 95% of auto insurers leverage credit scores in their underwriting processes, where permitted. This ongoing debate underscores the complex intersection of credit usage and insurance practicum within the current regulatory environment.