Insurers say data shows low credit scores predict driver risk behaviors

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The insurance industry says they now have evidence that if you have a bad credit rating, you’re more likely to brake or step on the accelerator hard.

Also if you are less educated, single or are selling real estate for a living.

The American Property Casualty Insurance Association released a white paper it says validates auto insurance pricing decisions based on credit scores, marital status, education level and occupation. The research paper indicates that telematics data collected from January 2017 to June 2019 shows that two behaviors known to correlate with increasing claims costs – hard braking and brutal acceleration – also correlate with practices. pricing of insurers.

Dr Robert Hartwig, a professor at the University of South Carolina who wrote the article, said previous studies have shown that credit scores accurately predict losses. Hartwig is a former director of the Insurance Information Institute.

“The contribution to the literature here now is that there is a behavioral link that is demonstrated between two dangerous activities to be involved and loss in individuals who have specific credit attributes,” he said during a telephone interview Tuesday.

Consumer advocates say pricing decisions based on credit scores are inherently unfair because they penalize people for events they can’t control, like job loss or family death. The use of credit-based insurer scores is prohibited in California, Hawaii, Massachusetts, Michigan, and Washington.

“My take is that a person’s credit rating is often out of their control and can be affected by things like being born into a low income household, losing a job, getting sick, or just not being. “in the system,” “Amy Bach, executive director of United Policeholders, said in an email. “My 23-year-old employed daughter is having a hard time getting a credit card for no apparent reason other than she is 23 and has never had one before.”

Bach pointed to a Consumer Financial Protection Bureau document, which was released Tuesday, showing that consumers in predominantly black and Hispanic neighborhoods are most likely to see disputes appear on credit reports.

The insurance industry, on the other hand, points to a body of research that shows that lower credit scores are associated with a higher risk of loss.

The National Association of Insurance Commissioners reported in 2020 that insured drivers with the lowest credit scores suffered the most losses. The Vermont Department of Financial Regulation came to a similar conclusion after investigating the matter at the request of state lawmakers in 2016, as did the Texas Department of Insurance in 2004 and the Federal Trade Commission in 2007, according to the APCIA.

The APCIA white paper features graphs illustrating the “hard brake relativity” and “hard acceleration relativity” for drivers with low credit scores and high credit scores. Drivers with the lowest credit scores cost 28% more to insure than drivers with the highest scores, based on those behaviors.

Education levels showed a similar correlation. People with graduate degrees had the lowest relative insurance cost, based on hard braking behaviors, at around 0.9. College graduates scored around 0.95. Those with only a high school diploma, not having a high school diploma, or having a college clustered together at about 1.1.

The profession has also predicted driving behaviors. Librarians were low risk with a relative cost to insure around 0.9, while realtors had a relative cost of 1.1.

Population density had the greatest impact on driver behavior, with residents of less dense areas having a relative cost to insure of around 0.8, compared to around 1.2 for drivers in weaker areas. denser, says the document.

Hartwig says the telematics data adds “a missing behavioral link” to other studies that show the reasoning behind imposing higher premiums on certain groups. He said the credit-based insurance score is just one of many variables that will be used to determine the amount of premiums that any individual will pay.

“The rationale for maintaining these rating variables is that people pay a premium that is more like their actual losses,” he said. “It’s unequivocally fair to everyone.”

Bach, the policyholder advocate, said she was skeptical because the numbers can be used to show correlations in just about anything. But she said she can’t refute the APCIA data. Its main argument remains that consumers should not pay more simply because they have less access to credit than others.

“Please use something else, because it’s just not fair,” she said. “Since insurers seem to have access to huge amounts of data, they can use their sources, but not that.”

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