Recently, Washington State Insurance Commissioner Mike Kreidler told a legislative panel that credit scores must not be used as a factor to decide how much an individual should pay for his or her auto insurance policy.
He feels that such a factor will adversely affect people from lower income backgrounds as they are the ones who usually have a bad credit score. And he hopes to ban such a practice in the state of Washington.
Kriedler is of the opinion that in the current economic scenario, even responsible people are getting laid off and they end up consolidating their debts. This should not result in them having to pay more for insurance.
But on the other side of the spectrum, opponents of Kreidler’s policy, mainly comprising the insurance industry’s representatives, addressed the House Financial Institutions and Insurance Committee with their arguments. They feel that the credit score is an integral part of the decision making process of an insurance company. They said that risk analysis needs a basis for deciding who can be a financial burden to the company and the credit score is one such factor.
Kenton Brine, who is a representative of the Property Casualty Insurers Association, says that it is an actuarial decision which has resulted in the current situation which depends on the credit score to decide your rates.
Alex Hageli, who is another representative of this particular association, said that a lot of states actually allow the credit score to be used as a factor in deciding auto insurance rates. But he fails to understand the reason behind this, though there are a lot of notions and theories which try to explain the same.
He also said that the current laws do not require companies to explain how and why credit scores are working while deciding a persons insurance premium rates. They just need to be predictive.
The fact is that people with a good credit score are usually not affected by the marginal decrease in insurance rates that they get. They either save it or end up splurging it on non essentials. This was the view that was put forth by Robert Detlefsen, a researcher for the insurance industry. He also says that there is not any way to identify an individual on the basis of ethnicity or race.
Kreidler says that the state of Washington started using credit scores for premium rate calculation around 10 years back and tried to stop it in 2002. But instead, the state ended up settling for a compromise with the insurance companies with some restrictions which are not working. He strongly feels that this practice must be banned and the insurance companies must use factors like driving record and accident details for auto insurance and claims history for home insurance. He surmises by saying that it is not about being predictive, but about being fair to all.
There have been a lot of bans proposed against the current practice, but they have been stalled in the legislature. But this year is different given that pushing the change is as much a priority for Kreidler as it is for insurance companies to oppose it.