Legislative Moves Against Credit-Based Insurance Pricing

Several state legislatures are considering measures to prevent insurers from utilizing credit history in setting premium levels. Proposed bills in Iowa, New York, Oklahoma, and Pennsylvania aim to restrict insurers from applying credit-based scores when determining costs for homeowners and auto insurance, as reported by CNBC. Currently, California, Hawaii, and Massachusetts prohibit the use of credit scores for auto insurance, while California, Massachusetts, and Maryland impose similar limitations on homeowners' policies.

Michael DeLong from the Consumer Federation of America expressed concern to CNBC, describing the reliance on credit scores as inequitable, since it affects consumers irrespective of their actual risk factors. Supporting this concern, the National Bureau of Economic Research found that homeowners with lower credit scores face a 24% higher premium than those with higher scores, while drivers with poor credit pay an average of 69% more than those with good credit. Additionally, NerdWallet reported that high insurance costs linked to poor credit can exceed those resulting from a DUI conviction.

The insurance sector defends using credit-based assessments as a pricing tool. Bob Passmore of the American Property Casualty Insurance Association told CNBC that removing credit scores from the equation could lead to less precise pricing and the loss of potential savings for consumers. The wider industry implications of this credit-scoring discussion are also evident in the mortgage sector. Freddie Mac and Fannie Mae have decided to accept mortgages evaluated using the VantageScore 4.0, a credit score model co-owned by Equifax, Experian, and TransUnion, indicating a shift in credit evaluation practices.

Meanwhile, Iowa Insurance Commissioner Doug Ommen has raised concerns about the transparency and risk implications of private equity firms investing insurance premiums in more speculative private markets. These firms include Apollo Global Management, KKR & Co., and Blackstone, which have been scrutinized for their investment strategies affecting policyholders.