Citing racial inequalities, WA insurance commissioner pushes to end use of credit scoring to set rates

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How much you pay for home, auto, and auto insurance depends a lot on your credit score. If your credit is good, you tend to pay less. If it’s not that good, you’re probably paying more.

Now Washington’s Insurance Commissioner Mike Kreidler wants to ban the use of credit-based insurance rating to set prices. He says it’s a matter of racial justice.

“I’ve known for years it’s been well documented that this has had a disparate impact,” Kreidler said, noting that insurance scoring has been in use since the late 1980s.

Kreidler, a Six-term Democrat, first proposed a ban on credit scoring ten years ago. He said he revived the idea this year due to the economic fallout from the COVID-19 pandemic and the recent push for racial justice.

“The whole Black Lives Matter and the racial consciousness have certainly helped elevate it again,” Kreidler said.

Kreidler and other advocates cite studies that have shown a correlation between low credit scores and people of color. They also cite the experiences of people like Marie, who asked the Northwest News Network public radio not to use her full name because she works in the insurance industry and fears retaliation.

“I drive safely, my husband and I have been insured for a long time, but I can’t afford the insurance in my own business,” said Marie.

The problem, says Marie, is that she and her husband have a lower credit score due to being renters and not using credit cards. Marie said she understands why insurance companies rely on credit scores to set rates – credit history correlates with risk – but she doesn’t think that’s fair, especially as a woman Afro-American.

“I think in our community we are less likely to use credit and less likely to be homeowners, we are less likely to have these factors that would make us appeal to insurance companies,” said Marie.

Currently, Marie pays $ 460 per month to insure four cars and three drivers through what she calls a “substandard” insurance company. Even with a discount for employees, she estimates that she would pay almost double to get insurance from the company she works for.

Marie supports the idea of ​​banning the use of credit scores to set auto and home insurance rates. But the proposal to the Legislative Assembly has faced stiff opposition from the insurance industry. During a recent public audience on the bill, industry representatives defended insurance scoring – which they say uses elements of a person’s credit rating – as objective, fair, accurate and predictive of loss.

“In fact, using these scores is the opposite of racial discrimination,” said Tony Cotto of the National Association of Mutual Insurance Companies (NAMIC) in Louisville, Kentucky.

Cotto offered himself as an example.

“I’m a married Hispanic man from Kentucky who has a law degree, drives a truck for 15, and works for NAMIC – and an insurance score wouldn’t tell you any of that because it doesn’t have to. importance, ”Cotto said. “What matters is how I behave.”

At that same hearing, consumer advocates said that while credit scores may not reveal a person’s characteristics, they are closely related to income levels and, by extension, race.

“It replaces or serves as a proxy for the race, whether the impact is intentional or not, the injustice is there and the discrimination is there,” said Douglas Heller of the Consumer Federation of America.

Both sides of the debate point to various studies that have examined the link between credit scores and race. Some studies find more correlations than others.

For example, a 2004 study by the Missouri Department of Insurance found that “the insurance credit scoring system produces significantly worse scores for residents of high-minority zip codes.”

And Heller, of the Consumers’ Federation, told the Senate Committee on Business, Financial Services and Commerce that people living in Seattle zip code 98118, described as the most diverse postcode in the country, pay the state’s highest penalty for credit-based insurance pricing.

However, a 2010 report by the Federal Reserve found “no evidence of disparate impact by race (or ethnicity) or gender,” but found “limited disparate impact by age.” The authors of this report, however, recognized “significant limitations” with the sample size and the credit history scoring model they used.

While the extent of racial disparities in credit scoring is a matter of debate, it is clear that rating people based on their credit history carries a lot of weight with insurance companies. In fact, Kreidler’s office told the Senate committee that a person with good credit and a drinking and driving conviction could pay less than a person with bad credit and no convictions.

Kreidler notes that four other states, including California, already restrict the use of credit scoring for insurance. Instead, he said, insurers should invest in other predictive tools like telematics that track a driver’s behavior. Kreidler’s bill to ban the use of credit scores by insurers in Washington is sponsored by Democratic State Sen. Mona Das. Twenty other Democratic sponsors have also signed in support.

Governor Jay Inslee is also pushing for adoption of the measure. Recently, Inslee compared the practice of using insurance rating to ” Red line “ – the now prohibited practice of denying mortgages or other financial services to people of color based on their place of residence. In Washington, it’s already illegal to use credit history to deny or cancel insurance coverage.

Yet the proposal drew opposition from minority Republicans and the state. Senator Mark Mullet, the Democratic Chairman of the Senate Committee on Business, Financial Services and Commerce.

Mullet said he would like to find ways to reduce insurance rates for good drivers with poor credit, but he worries that if credit scoring is banned, good drivers with good credit will see their rates increase. Mullet predicts it would hit older drivers particularly hard because he sees a clear correlation between credit scores and age.

“I think the unintended consequence is that you would have a huge change in the cost of younger consumers whose insurance premiums go down and older consumers who see their insurance premiums rise,” Mullet said.

However, AARP Washington’s Cathy MacCaul disputed this assumption during the public hearing. She testified that older drivers often have lower credit scores because they no longer have a mortgage or have stopped using credit cards. MacCaul also said workers 55 and older have been disproportionately affected by layoffs linked to the pandemic.

While Mullet does not support the bill in its original form, he said he hopes to get an amended version out of his committee on Monday. Instead of outright banning credit scores, Mullet’s version would limit their use to no more than 50% of the weighted factors used to determine rates.

In addition, Mullet would establish an 18-month moratorium on insurance companies raising rates for people whose credit scores drop due to the pandemic.

But Kreidler said in a statement he couldn’t support Mullet’s replacement proposal.

“A ban should be on the books of Washington state,” Kreidler said. “Anything less will be enough to protect the people of Washington when they need it most. “

Senator Das, the main sponsor of the measure, said “bolder action” was needed, but also indicated that she could support Mullet’s amended version of the bill.

“It’s not the leap forward like we wanted it to,” Das said. “It’s a step in the right direction.”

Two other proposals to Parliament, one in the House and the other in the Senate, would require insurers to provide reasonable exceptions for consumers whose credit scores are affected by extraordinary life events, including natural disasters, serious illness or layoff.

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About Nereida Nystrom

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