SIA's Insurance Education Blog

Credit Score Discrimination

  

  

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There is currently a debate in Massachusetts over whether insurance companies should be allowed to use credit scores when determining auto insurance rates. Currently Mass does not allow it, but most other states do. Check out this debate between Geoff Stanton (Of Stanton Insurance Agency) and Brad Williams (Of Boston Investment Advisors Inc). Is using credit scores fair or is it discrimination? You be the judge!

Brad Williams: I know that I missed this conversation, but if these factors lower rates for some of us, wouldn’t we want them to be used? Geoff, can you tell us how many other states use these factors?

Geoff Stanton: I did state that most other states use this now. The issues I would have are as follows: There is no proof that these factors lead to lower premiums. If I lost my job & was unemployed, the last thing I would want is my insurance renewal to go up because of it. Is it fair that if I went to & graduated from college that I would pay lower than my neighbor who has the same car & only graduated form high school or vice versa?

So while I agree that yes you as a highly educated person with a great credit score may benefit, I certainly wouldn’t want that to affect your insurance when your credit takes a hit due to a fraudulent scheme that was no fault of your own & takes 2 years to solve.

If you want more info let me know.

Thanks, Geoff

Brad Williams: Geoff, are you saying that most states do allow socioeconomic factors to be used?

After getting up close and personal to all the things Massachusetts does different than other states and usually at higher cost to our residents, I would put this in that category.  For example, a high school graduate most likely has the lowest career earnings and lowest average credit score so therefore I would expect that individual to have the worst on-time payment record and would be most likely to stop paying all together on their policy.  They may also be more likely to live in an area with lower home prices and more crime. We already do this by zip code in Massachusetts. Shouldn’t an insurance company be allowed to screen them out and put them in a higher risk pool?  Likewise, if a high school grad has an 800+ credit score, I doubt it would matter much since they pay their bills in their entirety and on-time.

What say you?  Given the fact that MA has the fourth highest auto premiums based on 2007 data, I think any thing we could do to lower them would be welcome.
P.S.  I thought they already outlawed this several years ago when GEICO and Progressive were coming to MA.

Geoff Stanton: Yes I am saying most states allow it.

I think you example is a little simplistic. It may absolutely work that way in some cases but my guess is that over the last 3 years credit scores of all sorts of people have taken a huge hit as Tom mentioned.

Using 2007 data would absolutely support your point.  If you used 2010 data you see that Mass has gone from 4th highest to top 10 lowest in terms of insurance premiums. Since the Managed Competition started in 2008 rates have dropped by an average of 30%.  The factors were not outlawed, rather a moratorium was put in placed but that can be changed by the insurance commissioner, it is not a law.

Brad Williams: My quick Google only found the 2007 data.  I am happy to hear that we are lower.  Is it primarily due to increased competition?

My sense is that socioeconomic factors must be material in underwriting or the insurance companies would not want to use them.  I’m a free market guy and I want to push the government out of the market.

Geoff Stanton: I would say yes due to competition once the state stopped setting the rates. I agree that government should be out of the market but not at the risk of discrimination

Brad Williams: Isn’t insurance largely about discrimination?  Older people pay higher rates for most types of insurance.  Older homes cost more than newer homes to insure.  Distance from a hydrant is important.  A Ferrari costs more to insure to than a Honda.  Why does a speeding ticket make me an unsafe driver and higher risk?

For most disability policies they want a medical exam so they can discriminate against those who aren’t a good risk.  What I am saying is that discrimination is not all bad and much of what insurance consists of is legalized discrimination.

Geoff Stanton: Not necessarily. Older people pay less for auto insurance in Mass (over 65 gets rate break). A Ferrari costs more to insure than a Honda because it costs more to replace. Speed plays a factor because it is harder to stop than if you drove slower….to me none of those are actual discrimination.

Think about what you are insuring & why.  I think you definition of discriminating is too broad.