In the US and other markets, car insurance quotes are often partly linked to credit scores. In some respects that is logical, since the proposer may well be looking to set up a direct debit to pay the premium monthly. So the ability to pay and the payment history of the individual, actually does matter.
But in terms of actual risk overall in a particular post/zip code, is a low credit score REALLY a true indicator of car damage, accidents or theft incidents? The answer is no, and in the US market in particular this credit scoring system can also have a race element to it. In short, areas dominated by BAME people can be classed as poor credit zones and that has a knock-on effect regarding auto insurance.
But moves are afoot to end this discrimination. With Biden-Harris in the White House the time is perfect for new laws, and AI systems that ignore ethnicity or geo-located, zonal credit scores. Technology now gives insurers and brokers more data than ever before on driver behaviour, car location, speed, favourite routes to work etc. So the argument that quotes should be based on anything beyond car and driver data, plus claims history, is increasingly weak, and some might say, totally outdated.
Here’s some news from Root Insurance;
A new consumer report exposes the harmful effect of a credit score-based auto insurance system on millions of consumers, particularly communities of color. Released by app-based car insurer Root Insurance, Credit Scores and Car Insurance: How unfair pricing practices discriminate against millions of drivers, illustrates how discriminatory pricing practices employed by the industry today force historically underserved communities to pay more for car insurance.
This report is the culmination of a national survey of 1,003 U.S. adults and in-depth discussions with consumers, academic experts, and industry stakeholders. Among its top findings, the report shows:
- 66% of the general American population are not aware that credit score is a factor in auto insurance calculations, including 74% of those with lower credit and 70% or Hispanic/Latinx people. However, once aware of this practice, more than half (63%) agree that using credit score to price car insurance is completely unfair.
- 82% of Americans expect premiums to be based on driving record; just 6% think credit score should be an important factor.
- 35% of Americans are unable to afford essentials because of their premiums.
- Those with poor or average credit are 2.2 times more likely than those with a good credit score to say they have a difficult time applying for and purchasing car insurance.
“Ultimately, a person’s credit score isn’t a good measure of their driving behavior,” says Alex Timm, co-founder and CEO of Root Insurance. “With efforts to combat systemic discrimination picking up steam in Washington, DC and state capitols across the country, eliminating credit-based pricing in auto insurance would be an important step towards creating a fairer system for millions of Americans and save drivers money.”
“We’re at a pivotal point where things are going to be different,” said Dr. Jerome Williams, Rutgers University Distinguished Professor. “Companies that continue to exploit and treat consumers unfairly, will eventually see consumers start to exit and voice their concerns. It’s going to hurt the company, and sometimes it will hurt the company so much that it’s tough to turn it around.”
Despite the near-universal reliance on cars, nearly two-thirds of Americans aren’t even aware that their credit score is a factor in auto insurance or how it may discriminate against them. The report explains how credit scores determined through factors such as credit history and usage, disproportionately hurts underserved communities including immigrants, those with large medical bills, and communities of color. Given that drivers with lower credit scores can pay up to $1,500 more in average annual premiums, this practice only widens the wealth gap and perpetuates systemic inequities embedded in society.
“It’s just life things like rent, food and gas—and yes, car insurance…that are hard to keep up,” said Daniela, a 24-year-old mother in Washington D.C. who continues to struggle with poor credit caused by her first credit card when she was 18.
With 35% no longer able to afford to pay for car insurance because of the pandemic, the report points to the need for urgent industry-wide change. Calling on the industry and policymakers to phase out credit scores from pricing decision-making, the report points to reform efforts already underway across the country, most notably in Washington State, where legislation to end the practice of using credit score in determining rates has been introduced as well as Root’s own pledge to eliminate credit scores as a factor in its car insurance pricing model.
“If I could pay less for car insurance, I could put that money toward my business. And if (my business) grows, I could put more money back toward my health,” said Shawna, a 27-year-old business-owner living with diabetes who reports skipping doses of insulin to afford necessities like car insurance.
The report, along with more information, resources and stories about the impact of credit-based pricing are available on http://www.dropthescore.com/.