Bad credit shouldn’t affect auto insurance, experts say. States are listening.
Pedro Montenegro has an impeccable driving record.
But even though Montenegro has said it has never had a car accident or been ticketed for a moving offense, it has never in his adult life qualified for affordable car insurance. It’s something that the Montenegro, 30, who makes a “good living” as a public relations officer in Washington, DC, says it’s inextricably linked to his bad credit rating, which is from l ‘order of 500.
He recently received several quotes for monthly premiums of around $ 350 for minimum coverage for a modest used car – a figure he can’t afford.
Montenegro, who is American of Guatemalan descent, faces the same struggle faced by millions of drivers across the country who have exceptional driving records but pay higher premiums because they have bad or no credit. credit history. These two factors are much more prevalent among consumers of color. Subsequently, economists, consumer activists, state and US lawmakers, and even some regulators say such practices are a blatant example of systemic economic racism, whereby black and Latino consumers pay higher premiums. high, even when they present less risk on the road. .
“When insurance companies rely on people’s credit histories, they perpetuate the systemic biases that have plagued our society for generations,” said Doug Heller, insurance expert at the Consumer Federation of America, a group of nonprofit advocacy. Heller added that it is “only false” that in all but two states drivers are required by law to purchase auto insurance, but the government does not adequately regulate its price.
Representative Rashida Tlaib, D-Mich., Introduced legislation that would end the practice at consecutive congresses. “Someone who hasn’t had access to banking or credit and is a good driver should pay no more than someone with multiple DUIs who has access to financial stability,” she said. .
Having identified this disparity and the lack of federal action, a growing number of states are seeking to ban auto insurance providers’ dependence on credit-based pricing. A few insurance companies, in states where possible, have measures in place to rely exclusively on driving behavior to determine premiums.
“It’s part of that critical piece of economic opportunity in society, where prohibitive rates can keep you from coming and going from your job, or getting your kids where they need to be,” Heller said.
“Red line of modern times”
According to consumer experts and economists, the use of credit-based pricing inherently harms consumers of color, simply because people of color are much more likely to have bad credit or no credit at all. According to a 2019 study by the Urban Institute, a left-wing social policy think tank, more than half of white households in the United States had a FICO credit score above 700, compared with just 21% of black households. .
The study found that 33% of black households with a history of credit had poor credit and had no credit rating, compared to only 18% of white households with no credit rating. Studies show that the numbers are similar in Hispanic households.
Because nearly all auto insurers rely heavily on credit scoring, in various proprietary formulas, to determine prices, people of color pay disproportionately for auto insurance, experts said, with extensive research. supporting.
Research by the Consumers’ Federation, for example, found that in predominantly black zip codes, consumer premiums are 60% higher than in predominantly white zip codes. That difference can amount to more than $ 3,300 per year on annual premiums, according to research by Consumer Reports.
“To refer to this as modern day redlining is correct,” said Darrick Hamilton, professor of economics and urban policy at the New School for Social Research.
Insurance companies evaluate different information in their rates. This tends to include not only credit history, but also age, type and amount of coverage sought, how much and how often one drives, and a plethora of personal information which may include gender, marital status, medical history, smoking status, education, employment and zip code.
It is illegal to ask questions about the breed. In almost all states, regulators explicitly define what can and cannot be reviewed to determine prices.
Insurance commercial groups have systematically defended their formulas including credit. They say it’s part of a more comprehensive, risk-based methodology that allows consumers to pay less overall. These groups say better credit correlates with fewer claims and accidents.
But even many in the industry over the past 18 months have recognized that maybe it is time for a change. Last year, the National Association of Insurance Commissioners, a regulator guiding the industry, appointed a committee to study whether certain underwriting practices were discriminatory. The Race and Insurance Committee, established in July 2020 following the murder of George Floyd, will meet this month to discuss the progress they have made.
States take the lead
The issue has caught the attention of state lawmakers. This year alone, proposals to ban the use of credit-based pricing in the auto insurance industry have emerged in Colorado, New Jersey, New York State and Oregon.
“I just don’t understand why your credit score makes you better or worse as a driver,” said New York State Senator Kevin Parker, a Democrat who sponsored the bill. “It shouldn’t be more expensive for you to be Black or Latino in our state, period.”
Those states, if their proposals are passed, would join California, Hawaii and Massachusetts, which all banned the practice years ago.
In Washington state, the agency that oversees the insurance industry banned the practice for three years with emergency executive action this year after a bill that proposed to do so was blocked in the Legislative Assembly.
“The insurance companies’ argument that a credit rating is somehow a reflection of their ability to keep prices low is absurd,” said Washington Insurance Commissioner Mike Kreidler, critic of longtime credit rating and former Democratic congressman, in an interview. “Insurance companies will cut you off pretty fast if you stop paying your premiums.”
The movement is also happening in the corporate world. Root Inc., a publicly traded auto insurance company, was founded in 2015 as the first auto insurance provider to use only driving behavior as the basis for pricing insurance. The company, which relies on a smartphone app that tracks a user’s conduct, offers a no-credit scoring process in states where it is able to do so, based on specific national regulations, and s ‘is recently pledged to participate in an expansion drive to all 50 states by 2025. This option, while touted as fairer, has raised further concerns about accuracy and, most importantly, user privacy. as the technology constantly monitors a user’s movement.
Root CEO Alex Timm said in an interview that driving ability is by far “the most predictive variable” of whether someone should be expensive to insure.
“It’s causal,” he said. “Everything else is correlative.”
A handful of other tech companies are laying the groundwork to offer similar products, including an auto insurance app called Loop, which promises “mission-driven, AI-powered, social good-driven auto insurance.” .
On DC radar
Progress at the federal level has been less robust, but a conversation is underway.
President Joe Biden has indicated repeatedly in recent months that his administration is keen to tackle the problem. At a town hall in February, Biden said, “If you go ahead and want to get insurance, and you’re in a black neighborhood, you’re going to pay more for the same insurance than I’m going to pay for. the exact same house. “
“Your car, you’ve never had an accident in your car. You live in a black neighborhood, you are going to pay a higher premium on your car, ”he said. The White House did not respond to questions about whether action is planned to resolve the issue.
Congress lawmakers have come up with proposals, however. Senator Cory Booker, DN.J., introduced a bill last fall to ban the use of credit scores and other measures deemed discriminatory in the pricing of auto insurance, as did Tlaib in the House , although none of the bills moved forward.
In the meantime, Montenegro relies on public transport, which has been reduced by the pandemic, and, sometimes, on rental cars, to get around.
But he said he was optimistic about the national conversation about economic racism and the movement he sees in the state and corporate spheres.
“You think, and perhaps it is naive, that this is something that happened to past generations and people of color decades ago. Not yours, “he said.” But the truth is, now too it’s mostly people of color that it affects, and it’s so crucial that we do something about it. “