WA Insurance Commissioner’s Rule Banning Credit Scores in Insurance Should be Emulated by Other States
This Tuesday, March 23rd, consumers in Washington State won a sweeping victory. Washington Insurance Commissioner Mike Kreidler issued an emergency rule banning the use of credit scores in pricing auto, home, and renters’ insurance for the next three years.
Why does this matter? Because insurance companies use credit score as a factor in setting insurance premiums, especially auto insurance premiums, and they charge consumers much higher rates if they have fair or poor credit. This rule will prevent a sharp increase in premiums for consumers who have been harmed by the COVID-19 pandemic, and who would see their premiums rise when the CARES Act expires. As a result, many consumers will save hundreds of dollars per year.
The background: auto insurers use credit-based insurance scores (which use similar data to the familiar 350–800 FICO scores) to set prices for policyholders. They charge more, for example, to drivers with lower credit, even when they have perfect driving records. Using data on auto insurance premiums acquired from Quadrant Information Services, LLC, Consumer Federation of America conducted an analysis and found that in Washington State, consumers with fair credit see a 35% increase in their auto insurance premiums, compared to if they have excellent credit. And if consumers have poor credit, they see a 79% increase in their premiums.
Credit scores have long been a deeply problematic tool in insurance pricing, in significant part because of the systemic biases that lead to lower average credit scores for Black, Brown, and Indigenous consumers. That is why the use of credit should be banned irrespective of the insurance industry’s tenuous arguments that the scores are related to risk. Even if one previously accepted those arguments, the landscape has changed dramatically as a result of the pandemic.
The COVID-19 pandemic and its economic impact have harmed tens of millions of Americans. Many people have gotten sick and needed medical care, many more have lost their jobs or seen their hours cut, and everyone has had to make substantial changes to minimize exposure to the disease. When people lose their jobs or undergo economic hardship, they often struggle to pay their bills and their credit scores usually decline. Currently the federal CARES Act, passed by Congress last year, prevents some negative reporting to credit agencies, buoying credit scores, but those protections will expire, which could lead to a flood of declining credit scores.
The pandemic created these circumstances for millions of people through no fault of their own and cannot be connected to whatever risk relationship insurers claimed prior to the pandemic. Credit scores have become, as Commissioner Kreidler explained in his emergency regulation, “unreliable and therefore inaccurate when applied to produce a premium amount for an insurance consumer in Washington state. This makes the use of currently filed credit based insurance scoring models unfairly discriminatory,” according to Washington law. Washington State law requires its Commissioner to ensure that insurance rates are not excessive, inadequate, or unfairly discriminatory.
In January, Commissioner Kreidler supported the Washington bill SB 5010, sponsored by Senator Mona Das, which would have permanently banned the use of credit scores in insurance pricing. Consumer Federation of America and other organizations testified in support of the bill and wrote letters to legislators. Unfortunately, the bill did not make it through the Senate.
Although the legislature chose not to address the general problem of using credit in insurance pricing, Commissioner Kreidler recognized an urgent need to tackle the pandemic-driven distortions that make credit unfairly discriminatory separate and apart from those broader concerns.
The emergency rule bans the use of credit score in auto, home, and renters insurance for three years and takes effect immediately. It states that “insurers shall not use credit history to determine personal insurance rates, premiums, or eligibility for coverage.” Consumers will see substantial protections as a result. To give just one example, in the ZIP code 98118 in Seattle, Allstate charges consumers with excellent credit an average annual premium of $846, but charges consumers with fair credit an average premium of $1,204 per year. And consumers with poor credit are charged $1,589! This rule would save those latter consumers over $700.
The Washington State rule is not the only action taken to help consumers. The Nevada Division of Insurance recently issued Regulation R087–20, which bans insurers from using changes in consumer credit history to increase consumers’ premiums if those changes occurred between March 1, 2020 and the two years after the end of the pandemic. CFA also testified in support of this regulation and countered industry misinformation about the rule. Early in the pandemic, Pennsylvania Insurance Commissioner Jessica Altman also announced a moratorium on credit-driven rate increases upon policy renewal.
Through these administrative actions, Washington, Nevada, and Pennsylvania have temporarily protected the public from the penalties associated with credit scoring, which will provide much needed relief to millions of consumers in those states. Insurance commissioners in other states have the same power and their constituents face the same problems. We urge them to adopt similar rules banning credit scores in insurance pricing for the duration of the pandemic and the multi-year impact it will have on consumers’ credit scores once the health crisis is behind us.