Several Washington state legislators led by Insurance Commissioner Mike Kreidler are proposing to ban insurers from using credit scores in determining insurance rates.
Since 2002, Washington State has imposed significant limits on credit scoring. Two bills currently before state lawmakers would enact a near-total ban on the use of credit scoring to set insurance rates.
House Bill 2513 is sponsored by Rep. Sharon Nelson (D-Maury Island), The Senate version, SB 6252, is sponsored by Sen. Jeanne Kohl-Welles (D-Seattle).
“You should not have to pay a high premium if you are a responsible driver merely because, for whatever reason, you were late on your card payment one month,” said Nelson in a press statement. “Insurers should set rates based on factors that have a proven correlation to insurance risk—factors like driving record, age, and the condition of the property.”
Kreidler added, “In today’s economy, the insurance industry’s reliance on credit scoring is especially unfair. Thousands of consumers have contacted my office over the last 10 years, upset because they don’t understand what their credit has to do with how they drive their car or treat their property.”
Poor Credit, Big Claims
Insurers argue credit scoring makes sense because a wealth of research shows people who do not manage their credit well tend to make more expensive insurance claims. By taking this data into account, insurers can more easily charge higher rates to people who are likely to cost them more money.
Insurers that use credit scores implement them along with dozens of other factors to set premiums. No insurer uses credit scores as the only factor in determining rates, and some—mostly smallers ones—do not use them at all.
Unlike other types of information that can be difficult or impossible to monitor (such as how often a driver speeds), a sophisticated system exists for monitoring credit scores. An insurer that wants to use a credit score does not have to conduct any original research but instead contacts a credit bureau and pays a modest fee.
Better Accuracy, More Certainty
Alex Hageli, personal lines director at the Property and Casualty Insurance Association of America, argues the use of credit scoring benefits consumers.
“Insurers consider credit information in their underwriting and pricing decisions for only one reason: To rate and price business with a greater degree of accuracy and certainty,” said Hageli. “The more accurately companies can price, the better they can compete, and increased competition leads to more choices and lower costs for consumers.”
Matthew Glans ([email protected]) is a legislative specialist in financial services for The Heartland Institute.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
