Marty Stauffer owns an insurance brokerage in Lynden, Washington, where he sells auto, home, and other insurance policies. When customers stop by Stauffer Insurance to chat these days, he asks them about their credit scores.
“How’s your credit score? Is it good? Do you pay your bills on time?” he asks. Then comes the unexpected punchline to clients with excellent credit, which he shared with the Washington Examiner: “Your insurance is going up.”
Premiums for drivers and other insurance policyholders with excellent credit are scheduled to rise because Washington Insurance Commissioner Mike Kreidler demands it. Many insurance companies currently charge lower rates to those with exemplary credit scores. Kreidler calls this systemic racism.
“The use of credit scoring is unfair and has a disproportionate economic impact on low-income individuals and communities of color here and throughout the rest of our nation,” Kreidler wrote in an open letter to insurance companies last July.
The letter sought the insurance companies’ support to ban pricing by credit scoring in the Legislature. That legislative effort stalled out, leading Kreidler to complain politely, “Regrettably, the insurance industry carries way too much weight in the Washington State Legislature.”
More pointedly, the insurance commissioner complained, “Even if it’s unfair, even if it’s racist, [insurance companies] don’t care, as long as they can keep [credit score pricing] in place,” King 5 News reported.
Kreidler has unilaterally banned credit score pricing by a temporary emergency rule instead of further engaging the legislative process. The rule is scheduled to go into effect on June 20 and has survived a court challenge by insurance companies. In a news release, the Office of the Insurance Commissioner warned that insurance companies that do not comply with the order are “in violation of state law” and will be subject to “disciplinary action.”
Most insurance policies in the state are written for automobiles because insurance is required by law of car owners. “Even most renters have auto insurance,” Stauffer said.
And those drivers are going to be in for either a pleasant or a rude surprise when they go to renew their policies after June 20. The rule is supposed to be revenue-neutral. The discounts will go away, hiking premiums of those with excellent credit, and that money will go toward lowering the rates of people with more inadequate credit.
At least, that’s how it’s supposed to work. “It usually takes companies months, if not years, to set rates,” Stauffer said. This emergency order, issued in March and scheduled to take effect in June, is happening almost lightning fast by industry standards, and there’s plenty of room for error.
The risk managers’ jobs are further complicated because it isn’t only Washington state attacking credit score-based pricing.
“Insurance regulators in some other states are pursuing efforts to introduce state of Washington-like prohibitions against insurers using credit-based insurance scores for underwriting. Efforts can take the form of legislation or executive order,” Jerry Theodorou, director of the Finance, Insurance and Trade Policy Program at the R Street Institute, told the Washington Examiner.
On the question of systemic racism, Theodorou pointed to an old but comprehensive report by the Federal Trade Commission that looked at credit score pricing in insurance. It concluded that insurance companies prefer to do that when possible because people with excellent credit simply file fewer claims. Theodorou said the FTC study “did not find evidence of racial bias.”
The filing of fewer claims could be valid for several reasons. They may be more cautious in their driving, for instance. They may also be more mindful that filing small claims over minor fender benders ends up boosting rates and having enough cash or credit on hand to absorb the cost.
