Mike Kreidler is a former US Congressman, Army Reserve veteran, and currently a six-term insurance commissioner in the state of Washington. He’s responsible for making sure that consumers aren’t being ripped off by their insurers, and he’s good at his job. In 2020 he won the National Association of Insurance Commissioner’s “Excellence in Consumer Advocacy Award.”
Kreidler has long been opposed to the use of credit in pricing insurance. Last July, he wrote an open letter to industry executives, asking for their support. He said:
“My reasoning is straightforward: 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.”
Recently, Kreidler issued an emergency order to restrict insurers from using a drivers credit to price their auto, renters, and homeowners insurance. In response, one of the larger insurance industry trade groups sued to stop him.
Insurers argue that using credit is in the consumer’s best interest, but there is almost no transparency or resources to help consumers judge for themselves. As a consumer you might have a few basic questions like:
1. How does credit affect my insurance bill?
2. How much is the penalty for having lower credit?
3. Why do most insurers still use credit, if it’s unfair?
With the belief that consumers deserve to be treated fairly and be informed, I set out to find these answers. To be transparent, I’m not an average consumer… I’m the Co-CEO of Loop, a car insurer that believes that where you go is what matters, and has taken a stand to never use credit.
I started my research by accessing a public records database for information about Progressive, Root, Mercury, and Noblr, all insurers that actively use credit to quote drivers.
- How much more does my insurance cost change, because of my credit score?
This was a very difficult question to answer. While all four companies I researched used credit in some way, three out of four masked their methodology in either confidential portions of the filing or by purchasing a proprietary insurance-credit-rating score that translates a FICO score into a non-discernable “insight score” or “credit tier.”
In short, it is clear that many insurers use credit, but nearly impossible as a private consumer to know how much they charge for it.
- How much am I being penalized if my credit gets worse during the pandemic?
Root is the only one of the four public filings I researched that publishes data on how credit score impacts a car insurance bill. If I were a customer of Root (most definitely a hypothetical) with a credit score of 700, I’d end up paying $272 more per year, than someone with perfect credit. If my credit score deteriorated like most other Americans during the pandemic, the bill could go up at renewal. For a credit score of 600, I’d pay $498 more per year, than someone who survived the pandemic with perfect credit.
- Why do most insurers still use credit, if it’s unfair?
Spending an extra $42 more per month because of a low credit score has a meaningful impact on a family’s budget. But for the $1.3 Trillion property and casualty insurance industry, charging an extra $42 is not even a rounding error.
Insurers quite possibly use credit not because of the unit economics, but because there is tremendous cost and friction that comes with changing tradition. If Mike Kreidler is successful, carriers that want to write new business or renew policies in Washington state will have to pay to re-develop a custom database of policyholder data, for just one state’s unique rules. They’ll need to revisit state regulators to have their rates re-inspected and interrogated by Mike Kreidler and his staff. And they’ll need to devote more resources to actuarial science research and development so that they have a shot at maintaining profitability for shareholders.
For these reasons perhaps, Root (for being transparent as they are about the use of credit) estimates that it will take them 5 years to remove credit from the way they price.
To sum it up, the debate about whether consumers benefit from credit is hard to quantify, but certainly people with lower credit are penalized a lot. If Mike Kreidler is successful in outsparring the insurance lobby’s legislative and legal assaults, removing credit will cost insurers a great deal. But both Loop and Mike Kreidler would agree, removing credit is the right thing to do.