Background:
Credit Based Insurance Scores (CBIS) consider your use of credit (not your credit score) to help determine your insurance premiums. Multiple studies have shown that in general, people who use credit responsibly are less likely to file insurance claims. This does not necessarily mean they have fewer accidents, but it does indicate they are more likely to pay out of pocket for minor damage and only file claims when the cost to repair or replace is fairly significant. This reduces the claims load on the insurance carriers, which results in significant cost savings. When a claim is fairly minor, an insurance carrier frequently pays more in the cost to handle the claim than they pay out for any damages so fewer claims can make a real difference even when the claim amounts involved are relatively small.
History:
In 2020, Insurance Commissioner Mike Kreidler (WA) introduced legislation to ban the use of CBIS in Washington State. This legislative effort was defeated.
In March of 2021, Insurance Commissioner Mike Kreidler (WA) announced an emergency rule that prevents your credit score from impacting your insurance. This Emergency Order was challenged and overturned in court in September of that same year.
In early 2022, Insurance Commissioner Mike Kreidler (WA) attempted to legislate the ban on CBIS again, and once again was defeated.
In late January, 2022 Insurance Commissioner Mike Kreidler (WA) created an Order (which is different from an Emergency Order), banning the use of CBIS yet again. That order has been challenged in court. If history is any guide, it will probably be defeated at some point but in the meantime insurance carriers are banned from using CBIS.
In each of his four attempts thus far, Mr. Kreidler has refused to allow insurance carriers to phase in these changes over time, which means that individual premium costs can change dramatically. Within our Agency, we have seen premium increases of as much as 80% overnight, with the heaviest impact falling on retired people on fixed incomes and people whose income was reduced during COVID but managed to keep their credit use responsible and thus would otherwise have earned a much lower premium.
We’re getting a lot of questions about the impact this may have on your insurance premiums, and that is a very valid concern. Let’s take a look at the who, what, why, when and how of this order.
Who will be impacted by this? This order applies to all personal/private (aka non business) homeowners insurance, renters insurance and auto insurance policies. So any private person with insurance in WA state will be affected.
What will be affected? The insurance premiums paid by any individual person in WA.
When did this order take effect? All new policies effective on or after June 20,2021 and all renewals processed on or after that date. Renewals are usually processed 4-6 weeks prior to the renewal date so the rule will affect policies with a renewal date 4-6 weeks after June 20, 2021.
Why has the Commissioner ordered this? The Commissioner believes that “The insurance industry’s dependency on the discriminatory practice of credit scoring has always been unfair”. The Commissioner does not offer any statistical evidence to support this claim.
On the other hand, the FTC released a report in 2007 entitled “Credit-Based Insurance Scores: Impacts on Consumers of Automobile Insurance: A Report to Congress By the Federal Trade Commission”. This report concluded that “Using a large database of insurance policies, the study shows that scores are effective predictors of risk under automobile policies. At the same time, scores are observed to be distributed differently among racial and ethnic groups, and this difference is likely to have an effect on the insurance premiums that these groups pay, on average. Nonetheless, scores appear to derive a relatively small amount of their predictive power from their correlation with race and ethnicity. Finally, the Commission could not develop an alternative scoring model that would continue to predict risk effectively, yet decrease the differences in scores among racial and ethnic groups.” There have been a number of studies done since the 1990s that support this position. So the actuarial science available does not support the Commissioner’s position. As someone remarked, “Using credit scores as part of premium calculation is great actuarial science but incredibly poor marketing science.”
The Commissioner’s order is set to expire three years after the CARES Act ends, and that end date has yet to be determined. As most insurance carriers use a three year look back when determining insurance premiums, this gives consumers time to rebuild their credit before it can again be used in determining insurance premiums.
What is the effect on consumers? Studies completed in 2016 and 2017 by the Vermont Department of Financial Regulation and by the Arkansas Insurance Dept. found that when credit is removed from insurance premium calculation, 60-70% of consumers experienced an increase in rates. Our Agency’s experience thus far has borne this out.
What can you do? You can visit the Office of the Insurance Commissioner’s website at www.insurance.wa.gov and provide them with your feedback directly. You can also visit https://coalitionforfairinsurance.org/ which is a website dedicated to the return of fair insurance premium for our state.
Please don’t hesitate to contact us if you have any questions or concerns about this, or anything else related to insurance – we are here to help!