While InsurTechs like Loop and Buckle are trying to reshape the future of insurance without using credit scores to underwrite or price policies, the rest of the industry has yet to embrace the change.
“Several insurers have begun to use telematics in their pricing decisions, but they still rely on proxies like credit history and employment status that appear to correlate with driver risks but can unfairly penalize someone who is actually a great driver,” notes Ed Arovas, Loop’s head of insurance and a former president and chief operating officer at commercial auto insurer Amalgamated Casualty Insurance Company.
Past studies conducted by state insurance regulators take a different position, affirming clear and equitable benefits for all drivers from the use of credit scores. A 2017 Arkansas Department of Insurance study, for instance, determined that 80 percent of consumers “either received a discount for credit or it had no effect on their premium.”
A 2016 study by the Bureau of Insurance in Virginia concluded, “It would be difficult to conclude that [automobile] insurance policyholders are unfairly burdened by insurers’ use of consumer credit information or credit scores.” And an earlier study by the U.S. Federal Trade Commission stated that credit scores have “little effect as a ‘proxy’ for membership in racial and ethnic groups in decisions related to insurance.”
Robert Hartwig, a clinical associate professor of finance and director of the Risk and Uncertainty Management Center at the University of South Carolina, agreed with these conclusions. “It’s important to understand that no insurer knows the race of anyone applying for insurance; this information is not collected,” Hartwig said. “The industry is 100 percent race blind. It has always been that way and always will be.” (Article continues below)
Asked if credit scores and other proxies inadvertently result in penalizing people from disadvantaged backgrounds, Hartwig demurred. “All underwriting criteria cannot be unfairly discriminatory. That’s the law,” he explained. “This means the criteria have to be backed up, first and foremost, by actuarial data proving an irrefutable and significant statistical association with claim frequency and severity.”
“Every insurer, every state insurance department and even federal agencies that have looked at credit scores have found an extremely strong correlation with claim frequency and severity from an actuarial and statistical perspective,” he said.
This correlation is “so high,” Hartwig said, that were credit scores to be eliminated as an underwriting factor in automobile insurance, “it could potentially have an adverse impact on the policyholders who generate fewer losses. In effect, they would be required to subsidize the policyholders generating more losses.”
Sharing this opinion is Tony Cotto, a former Kentucky state regulator who has served on the staff of the National Association of Insurance Commissioners. “Credit-based insurance scores are extremely correlated to the risk of loss,” said Cotto, presently the director of auto and underwriting policy at the National Association of Mutual Insurance Companies (NAMIC).
“There’s no disputing that,” Cotto continued. “A person’s credit score is a snapshot of the risk of loss the individual poses at a particular point in time. They are not static, meaning the person has control over their credit. If they pay their bills and taxes on time, pay off their debt, and keep their credit card balances low, they will benefit in many ways—auto insurance among them.”