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Washington residents with good credit scores face sticker shock when their car or home insurance comes up for renewal. Have you noticed that your rates have gone up significantly?
Rates are increasing because Washington Insurance Commissioner Mike Kreidler has banned insurance companies from using credit scores in setting rates.
The policy went into effect in late June. Since most insurance policies are sold annually, residents are getting a sticker shock whenever their policies are set to renew.
Banning credit rating was rejected by the Washington Legislature earlier this year and instead enacted by the Office of the Insurance Commissioner by an emergency rule.
The rule is supposed to be revenue-neutral, meaning insurance companies cannot just raise rates on those with excellent credit. Insurance providers have to lower rates on those with worse credit as well.
Kreidler argued credit-score-based pricing unfairly penalized those with poor credit, including minorities.
A Federal Trade Commission report to Congress that looked at the issue did not find overwhelming evidence of racial bias in this kind of insurance pricing.
Rather, the study found, “Credit-based insurance scores are effective predictors of risk under automobile policies.”
Credit scores “are predictive of the number of claims consumers file and the total cost of those claims,” and using such scores in setting insurance rates is “therefore likely to make the price of insurance better match the risk of loss posed by the consumer,” the FTC said.
The federal agency further found this to be accurate within demographic groups.
“Tests also showed that scores predict insurance risk within racial and ethnic minority groups (e.g., Hispanics with lower scores have higher estimated risk than Hispanics with higher scores). This within-group effect of scores is inconsistent with the theory that scores are solely a proxy for race and ethnicity,” the report said.
In an address to a conference put on by the Professional Insurance Agents (PIA) and the Independent Insurance Agents & Brokers of Washington in September, the insurance commissioner decried the influence of big data and big, out-of-state insurance companies.
Kreidler denounced a worldview “driven by numbers.” He protested against “boiling everybody down to an algorithm that tells you, ‘Oh this is a good person,’ because they’re likely to give us a bottom-line number that we like, ‘And this person is a bad person,’ regardless of the circumstances that they may wind up in.”
The insurance commissioner admitted of credit scoring, “Yes, it is a predictor. It also has the opportunity to dramatically impact the number of resources that a company has to spend on underwriting. They don’t have to spend a lot of time taking a look at how they drive a car or maintain their home because they take a look at some statistics, some numbers.”
“And where does it stop? Where does it stop?” Kreidler asked.
PIA lobbyist Mel Sorensen, speaking at the same conference on a different day, pointed out Kreidler’s office opposed two bills in the Legislature this year which seem to undercut his arguments.
One bill, supported by the insurance industry, would have mandated insurance companies can use credit scoring only when it benefits the ratepayers. The other bill would have allowed insurance companies to take life circumstances into account to counter a bad credit score.
The insurance companies have and continue to challenge this rule in court. The next challenge is scheduled to be heard in Thurston County Superior Court.