Bad credit shouldn’t mean higher insurance rates, WA official says

“It’s really unfair,” said Richmond, a Vashon Island resident who says she has a clean driving record but has seen her credit score drop by about 200 points this year. “People are suffering right now.”

Washington State Insurance Commissioner Mike Kreidler agrees. He said linking insurance to credit reports is a particularly damaging practice during a global economic crisis that has led to widespread unemployment.

Now, Kreidler is proposing legislation to cut the link between credit scores and insurance rates, so people whose credit declines during the pandemic also don’t end up owing more insurance.

“Those credit scores for a lot of people have gone into the tank – and we’re going to make sure they have to pay more now?” said Kreidler, a Democrat who regulates the state’s insurance industry. “… Where is the fairness in that?”

For Kreidler, it’s also a question of fairness. He said low-income people, who are disproportionately black, indigenous and of color, tend to be the most affected by the insurance industry’s reliance on credit scoring.

A study published this year by the Federal Reserve found that the typical white family has eight times the wealth of the typical black family and five times the wealth of the typical Hispanic family. Another 2007 Federal Reserve study found that Blacks and Hispanics had significantly lower credit scores than whites and Asians.

Also in 2007, a Federal Trade Commission report found that, given the credit history, black and Hispanic customers were on average rated as riskier to insure. This determination would generally lead these customers to pay more for the insurance.

Because of these factors, Kreidler views the insurance industry’s use of credit reports as a prime example of institutional racism.

In a July letter, Kreidler highlighted public statements by several insurance companies, released at the height of this year’s Black Lives Matter protests, on the need to tackle racism and social inequality.

“Leaders – public and private – must now take action to honor the commitments many have expressed recently to end the structural inequalities that have existed for too long in our society,” Kreidler wrote, while calling on the industry to support his bill.

Richmond’s insurance company, Allstate, did not respond to questions about Richmond’s rate increase, but wrote in an email that “race is not a factor in pricing, underwriting or settlement of claims ”.

In a letter last month, insurance industry groups told Kreidler’s office they opposed a draft of his bill.

The groups have called their credit-based scoring system an “objective and accurate method” for assessing the risk level of a person to be insured. They wrote that the credit-based insurance scores used to determine rates “relate to risk, not race or income.”

“Credit-based insurance scoring is a predictive tool for insurers – and just for consumers,” according to the letter, which was signed by the American Property Casualty Insurance Association, the NW Insurance Council and the National Association. of Mutual Insurance Companies.

As evidence, companies cited the 2007 FTC study, which found that credit-based insurance scores predicted quite accurately the likelihood that a customer was likely to file a claim.

As to whether the use of credit history reinforces systemic racism, Kenton Brine, chairman of the NW Insurance Council, wrote in an email that “the allegation is powerful, but unproven.”

Yet others see little or no connection between a person’s credit report and their likelihood of having an accident or filing an insurance claim.

Linda Taylor, vice president of housing and financial empowerment for the Urban League of Metropolitan Seattle, said credit scores don’t factor in many bills that people reliably pay each month, such as rent and utilities, making credit history a bad indicator. personal responsibility.

Corey Orvold, a real estate agent who teaches a home buyers class for the Tacoma Urban League, agrees. “I could have exceptional credit and be a terrible pilot, or be a terrible cook. There really is no correlation, ”she said.

Because black Americans in particular have been denied the opportunity to build intergenerational wealth, including being blocked from education and homeownership opportunities, they are less likely to be able to ask someone for money. parent or family member during tough times, Orvold said. This can lead to more defaults that negatively affect their credit scores, she said.

Orvold said charging more for home insurance based on credit history can make buying a home even more out of reach for those with less than stellar credit.

“The home insurance payment is part of your mortgage payment,” Orvold said. “It’s just another roadblock where people can say, ‘My home insurance is too high, I can’t afford to buy this house.’ “

Insurance companies, on the other hand, claim that taking credit history into account allows them to offer discounts to many customers who have good credit.

State level reports from Arkansas and Vermont seem to confirm this, finding that while some people paid more for insurance when credit reports were factored in, most customers paid less. Brine, along with the NW Insurance Council, argued that banning credit history consideration would drive up prices for most people.

But those who want to end the practice say it hasn’t been in California, where voters passed a measure in 1988 to ban the use of credit history to determine auto insurance rates.

According to a 2019 report from the Consumer Federation of America, auto insurance rates increased much more slowly in California between 1989 and 2015 than in other states. Liability insurance rates in California actually declined slightly during this time, according to the report.

Meanwhile, the cost increases can be substantial for people penalized due to their low credit rating.

A Analysis 2015 by Consumer Reports found that in Washington state, a driver with poor credit and a clean driving record would pay $ 690 more per year for auto insurance than a person with excellent credit and a driving conviction. affecting.

State Senator Mona Das, D-Kent, said if people find themselves with higher bills because of their credit score, it will be even more difficult for them to get out of debt and improve their credit. “It’s kind of like a circular problem,” said Das, who plans to sponsor Kreidler’s legislation in the state Senate.

Das said she also sees removing credit scores from insurance rate fixing as a racial equity issue, as well as something that the Legislature urgently needs to address due to the pandemic.

Passing Kreidler’s legislation is a priority for Seattle-King County’s Black Lives Matter and the Washington Black Lives Matter Alliance, a spokesperson said.

Richmond, the Vashon Island resident whose car insurance bill has doubled, said she believes there should have been a moratorium on insurance companies raising premiums for people during the COVID-19 crisis , similar to the statewide moratorium on evictions the state put in place earlier this year.

As that did not happen, she said Kreidler’s bill was a good solution.

“I’m not the only one suffering, and it has been the worst year possible,” said Richmond. “This is obviously something that fell through the cracks.”

Only two states – California and Massachusetts – prohibit the use of credit-based insurance ratings for homeowners and auto insurance policies, as Kreidler proposes. Hawaii prohibits the use of credit information only for auto insurance, while Maryland prohibits it only for home insurance.

Kreidler said he believes Washington should act quickly and set an example for other states across the country.

“This is where the company has to step in,” Kreidler said. “If we take a tough stance here, we’re setting a model for other states to commit to doing it, like Washington, we hope, will.”

Kreidler and Das plan to officially introduce their legislation this month.

A new 105-day session of the Legislative Assembly begins on January 11.

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