YOUR CREDIT SCORE AND YOUR INSURANCE PRICING
Insurance Commissioner Mike Kreidler (WA) recently announced an emergency rule that will soon prevent your credit score from impacting your insurance.
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 anyone in WA.
When does this order take effect? All new policies effective on or after June 20,2021 and all renewals effective August 19,2021 and later. Renewals are usually processed 1-2 months prior to the renewal date so keep an eye for your renewal offer well ahead of August 19,2021.
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.”
That said, the reason the Commissioner has made this decision an emergency order now is because the CARES Act (introduced to mitigate some of the effects of the COVID pandemic) prevents credit bureaus from reporting some debts as delinquent, thus creating a falsely high credit score. When the CARES act expires, all of that negative information will be updated and many consumers will experience a sudden drop in their scores which will impact their insurance premiums.
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.
How will consumers be affected? 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. If Commissioner Kreidler is correct in his assumption that many people currently have artificially high credit scores, then it’s probable that most consumers will experience an increase in rates which will effectively subsidize consumers with poor credit scores. However, when the CARES Act ends insurance premiums will not be as heavily impacted as they might have been otherwise for those people whose credit has suffered during the pandemic.
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!