Auto insurance companies have been using a modified credit score for years in assessing the risk that an applicant will incur a loss. There have actually been a number of studies, including the University of Texas and the Federal Trade Commission, that have shown there is a high correlation between your credit score and the potential that you will have an accident. Apparently those insureds with higher credit scores are more likely to have fewer accidents and thus pose a lower risk to their insurance carriers.
While State regulators have acknowledged this correlation, they do not usually allow insurance companies to use credit information as the sole determinant for accepting/denying/renewing a policy and/or raising/lowering rates. Hawaii, California and Massachusetts actually prohibit the use of credit scores in establishing premium pricing. So as a result, insurance carriers use a combination of other underwriting data, together with the credit information, to arrive at their own Credit-based Insurance Score. Since your credit score cannot (and should not) be used alone, the insurance company will also look at your driving record, claims history, age, gender, geographic location, etc.
What does it matter, you say? Your auto insurance premium can be significantly impacted by whether you have excellent credit, poor credit or even no credit history. A study by Consumer Reports found that auto insurance premiums for a single driver could run more than $500 higher for someone who does not have excellent credit scores. WalletHub.com obtained quotes from five of the largest auto insurance carriers in various states for two hypothetical customers with identical records, except one had excellent credit and the other had no credit history. The price differential was broad, depending on the insurance company and state of residency; however the average was a 49% higher premium for the customer with no credit history. This is huge!
For those with excellent credit history, they are pleased with the lower premium and quite happy that they are not subsidizing those drivers who are “statistically” worse insurance risks based on their lower credit. However there continues to be a lot of controversy about the fairness of using credit scores in the pricing equation. One argument is that they are unfairly penalized because their credit score has been impacted by “circumstances beyond their control”, such as illness, divorce, unemployment and identity theft. As a result, some states have adopted provisions allowing consumers to request that their insurer not use their credit score against them under these circumstances.
Probably the most common criticism of using credit scores is that it may discriminate against lower income and minority consumers. While there is a consistent pattern of differences in credit scores between racial and ethnic groups, the Federal Trade Commission has found that the correlation between credit scores and insurance risk remains statistically valid when race and ethnicity are controlled in the models. In other words, it has been determined that the use of credit scoring as an input into auto premium pricing is not unfairly discriminating.
The moral of the story is to accept the fact that your credit history is most likely being considered when you apply for auto insurance and it is up to you to do your best to be one of those drivers with excellent credit and enjoy the premium savings.
|Raymond J. Broek, CPA, MBA, Partner
T (973) 898 9494
The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals.