The credit-based insurance score has not gone without challenges over the years, but 2020’s protests over police brutality have pushed more industry figures to look for alternatives. At issue is the legacy of structural racism that has hindered economic opportunities for communities of color and led to disproportionately lower credit scores among them.
In a meeting with the National Association of Insurance Commissioners’ Special Committee on Race and Insurance in August, Alex Timm, founder and CEO of the usage-based auto insurtech Root, discussed the role of credit scores in auto insurance pricing, among other topics related to diversity, equity and inclusion in the industry.
“Although credit scores have been an issue that folks have recognized, since the murder of George Floyd, we have looked more broadly at discrimination in insurance,” Timm said. “We want to call attention to the issue and its impact on people of color and low-income. Auto insurance is government-mandated and [insurers] charge more for it because of [credit] scores.”
Birny Birnbaum, director of the Center for Economic Justice who also spoke during the NAIC meeting, told Digital Insurance that because credit scores are easy to acquire and are integrated in many underwriting models, insurers are largely reluctant to stop using them. While there is a lot of debate on whether to ban credit scores because it could be a proxy for race, there is little data or relevant information as insurers are not required to test for it, Birnbaum said.
“Insurers have a 20-year track record with credit scores, they claim it doesn’t have any bias based on race or income because they’re not asking for income,” Birnbaum said. “Basically saying, ‘we don’t believe in structural racism, other factors can’t possibly discriminate on the basis of race.’”
CEJ called for a moratorium on credit last March after the federal government passed the Coronavirus Aid, Relief and Economic Security Act (CARES Act), which placed a temporary hold on reporting negative credit information to bureaus that collect credit history.
“The pandemic has outsized the impact on the basis of race,” Birnbaum continues. “If we know credit was partially a proxy for race, that effect has only increased.”
The Washington State Insurance Commissioner, Mike Kreidler, issued an emergency rule to ban the use of credit scores to set personal property rates for the next three years. The ban is to prevent discriminatory auto, renters and homeowner pricing after the expiration of the CARES Act -- 120 days after the president declares an end to the pandemic national emergency.
“The insurance industry’s dependency on the discriminatory practice of credit scoring has always been unfair,” Kreidler said, in a press release. “But given that the federal protections from plummeting credit scores could end soon, we need to take action now to protect the public.”
Nevada has also put a ban on credit scores. Some other states, including Massachusetts, Hawaii and California never permitted credit scores to be used.
A moment for telematics?
Losing a major data point in credit scores presents a daunting challenge for insurers. For his part, Timm thinks Root’s usage-based approach can define a new industry approach that ties driving risk directly to driving habits rather than proxies.
“If I said: ‘This person speeds all the time and texts and drives, but this one has a bad [credit] score -- who has a higher premium?’" Timm asked rhetorically. “We are using behavioral data inside those vehicles. Things that cost lives -- like texting and driving. These are bad things and incentivizing folks to make those good decisions [is] good business, not just good for society.”
But there is always an unknown element to changing the formula. Matthew R. Carrier, a property and casualty actuary with Deloitte, said credit scores started being used because there was a correlation between a person’s propensity of loss and how they manage their finances -- indicated by their credit score.
“Telematics should replace part of what credit scores are getting at,” Carrier said. “But it doesn’t eliminate what credit scores can do. How I drive doesn’t necessarily tell insurers if I’m taking care of my car. Telematics won’t give insight into whether someone is parking under a street light. Those things are still correlated to credit scores.”
Carrier is confident, however, that regulators can manage the issues of bias: “I'm not saying there is no bias in the solutions today, but I do think that insurance departments do work to protect consumers per regulations and guidelines”
Enough state-level bans could force the issue, especially among the top tier of insurance carriers, says Harry Huberty, head of CIO research at Aite-Novarica. And many of those same companies have developed some kind of telematics program. But there are still structural issues for deploying telematics technology, Huberty adds. The need for a high-functioning smartphone app and data plan, which increasingly serve as the data collection mechanisms for UBI, could cause access issues.
“There are a large number of people who have smartphones, but not everybody,” Huberty said. “It is not a solution that is available to 100% of the marketplace.”
There are also larger conversations related to telematics data and privacy concerns that could make some consumers reluctant to use the technology.
“We think you need to move beyond the debate and get insurance companies to do testing of their algorithms,” says Birnbaum. “If it turns out a particular factor is a proxy for race and not predicting outcome, it should be eliminated. Testing is a part of the DNA of every financial service and it should be a part of the company’s algorithm.”
