Debate Over Credit-Based Insurance Scoring: Impact on Premiums
Several U.S. state legislatures, including those in Iowa, New York, Oklahoma, and Pennsylvania, are actively examining proposals to prohibit insurers from utilizing consumers' credit histories to determine premiums for homeowners and auto insurance policies. Known as credit-based insurance scoring, this practice assesses the likelihood of a customer filing a claim, potentially leading to higher premiums for individuals with lower scores.
Michael DeLong, a research and advocacy associate at the Consumer Federation of America, criticizes the use of credit-based scores as "extremely unfair." He argues that this practice unnecessarily increases insurance costs for many individuals, irrespective of their actual risk profile.
Despite previous legislative efforts to ban this practice, success has been limited. Currently, only a few states, including California, Hawaii, and Massachusetts, enforce restrictions on using credit histories for auto insurance decisions. For homeowners insurance, similar restrictions are in place in California, Massachusetts, and Maryland. The National Association of Insurance Commissioners highlights that most states curb the use of credit scores as the sole basis for rate increases or policy denials, requiring consumer notifications when credit data leads to adverse decisions.
Debate Over Credit-Based Insurance Scoring
Proponents of credit-based scoring, such as Bob Passmore from the American Property Casualty Insurance Association, argue that it plays a crucial role in maintaining fair and accurate risk assessments. Passmore contends that ending this practice could lead to less precise rate determinations and potential consumer savings losses.
A 2007 Federal Trade Commission study found that credit-based insurance scoring could benefit around 59% of consumers by lowering their premiums, while it raises premiums for 41%. Each insurer sets its criteria for an acceptable insurance score, although traditional credit scores often serve as a general guide.
Recent findings highlight significant premium disparities tied to credit scores. According to the National Bureau of Economic Research, homeowners with low credit scores face premiums 24% higher than those with excellent scores for similar coverage. Additionally, a NerdWallet analysis indicates that drivers with poor credit can face premiums averaging 69% more than those with strong credit scores. In some cases, a poor credit history may result in premiums higher than those for severe infractions like DUIs.
DeLong emphasizes that poor credit histories often stem from diverse reasons not indicative of financial irresponsibility, such as unemployment or unforeseen financial hardships. He suggests that it is unjust to penalize consumers for circumstances beyond their control.