Lawmakers Hope to Block Use of Credit Scores by Auto Insurers
Companies that provide car insurance to Maryland motorists are prohibited from using a person’s credit score in deciding whether to write them a policy. But companies may use credit scores in setting a policyholder’s premium.
The result, critics contend, is that certain car owners face higher premiums than they should.
Two state lawmakers hope this is the year the General Assembly outlaws the use of credit scores in setting car insurance rates. Two nearly identical bills have been introduced to achieve that goal — one by Del. Melissa Wells (D-Baltimore City), the other by Del. Jay Jalisi (D-Baltimore County).
Wells said many of her constituents don’t see a legitimate connection between credit scores and driving history. “Car insurances rates being astronomically high is one of the things I hear people talking about most often,” she said. The lawmaker recalled that her premiums nearly doubled when she moved from Washington, D.C., to Maryland.
The insurance industry vigorously defends the use of credit scores and has successfully fought legislation such as Wells’ numerous times since 2008. Insurers often point to a 2007 study by the Federal Trade Commission to buttress their argument.
“(Credit) scores effectively predict the number of claims consumers file and the total cost of those claims,” the commission concluded. “Their use is likely to make the price of insurance better match the risk of loss that consumers pose. Thus, on average, as a result of the use of scores, higher-risk consumers pay higher premiums and lower-risk consumers pay lower premiums.”
The same report acknowledged that the use of credit scores adversely impacted certain racial and ethnic groups.
“[A]s a group, African-Americans and Hispanics tend to have lower (credit) scores than non-Hispanic whites and Asians,” researchers wrote. “Therefore, the use of scores likely leads to African-Americans and Hispanics paying relatively more for automobile insurance than non-Hispanic whites and Asians.”
Nancy Egan, head of Mid-Atlantic government relations for the American Property Casualty Insurance Association, said in an interview that Maryland has a more robust and competitive insurance industry because of the factors companies can consider. There are 140 companies writing policies here, more than double the number in Massachusetts, a larger state with more restrictive regulations.
“Maryland law is great because if you have bad credit when you start the policy, they do need to review your credit every two years, and if your credit improves, then they have to offer you a better rate based on your better credit,” Egan said.
She also pointed to a 2019 Maryland Insurance Administration report which found that “the use of credit results in a premium decrease for substantially more policyholders than those that experience a premium increase due to credit.”
Both bills had hearings on Feb. 17. The House Economic Matters Committee pulled Wells’ bill from a voting list on Monday to give the panel time to consider two amendments. One provision, from the National Council of Insurance Legislators, would allow consumers to request relief due to a catastrophic event, serious illness, death of a family member, divorce, identity theft, job loss or military deployment.
Credit history is just one of several factors insurers can consider in determining a person’s premium in Maryland, but it can be a significant one. According to an analysis of Wells’ legislation by the Department of Legislative Services, an insurer that uses an applicant’s credit history may provide a discount or impose a surcharge of up to 40% based on the individual’s score.
Vermont legislators were told in 2017 that a ban on the use of credit scores would cost the average motorist $33 more per year.
The insurance commissioner in Washington state adopted a rule last month prohibiting insurers from using credit scoring for three years after COVID-19 financial protections end, money.com reported.
The prohibition followed a 2020 study by the Consumer Federation of America, which found that good drivers in Washington state with a poor credit rating paid 79% more for mandatory auto insurance than drivers with excellent credit.
“I just don’t think it’s fair to good drivers to punish them if they’ve had some credit difficulty,” said Gov. Jay Inslee (D), according to the Associated Press. The Washington state ban takes effect on Friday.
A proposal similar to Wells’ died in committee in 2019 and 2021.
Asked whether she’s concerned that some motorists might pay more if her legislation were adopted, Wells said the insurance industry is too shadowy to be able to draw firm conclusions. “It’s like a black box,” she said. “There’s not enough (information) outside the black box to understand what’s actually happening.”
Normally lawmakers with identical bills join forces. Wells said she was unaware that Jalisi, who was reprimanded by the General Assembly in 2019 for mistreating his staff, had introduced comparable legislation.