Lawmakers hope to block auto insurers’ use of credit scores
Companies that provide auto insurance to motorists in Maryland are prohibited from using a person’s credit score to decide whether or not to purchase a policy. But companies can use credit scores to set a policyholder’s premium.
The result, critics say, is that some car owners face higher premiums than they should.
Two state lawmakers are hoping this is the year the General Assembly bans the use of credit scores in setting auto insurance rates. Two nearly identical bills have been introduced to achieve this goal – one by Del. Melissa Wells (D-Baltimore City), the other by Del. Jay Jalisi (D-Baltimore County).
Wells said many of his constituents don’t see a legitimate link between credit scores and driving history. “With auto insurance rates being astronomically high, that’s one of the things I hear about most often,” she said. The lawmaker recalled that her bonuses nearly doubled when she moved from Washington, DC, to Maryland.
The insurance industry vigorously defends the use of credit scores and has successfully fought laws such as Wells’ on numerous occasions since 2008. Insurers often cite a 2007 Federal Trade Commission study to support their argument.
“(Credit) scores effectively predict the number of complaints made by consumers and the total cost of those complaints,” the commission concluded. “Their use is likely to ensure that the price of insurance better matches the risk of loss posed to consumers. Thus, on average, due to the use of scores, high-risk consumers pay higher premiums and low-risk consumers pay lower premiums.
The same report acknowledged that the use of credit scores had a negative impact on certain racial and ethnic groups.
“[A]Within their group, African Americans and Hispanics tend to have lower (credit) scores than whites and non-Hispanic Asians,” the researchers wrote. “Therefore, the use of scores likely leads to African Americans and Hispanics paying relatively more for car insurance than whites and non-Hispanic Asians.”
Nancy Egan, mid-Atlantic government relations manager for the American Property Casualty Insurance Association, said in an interview that Maryland has a more robust and competitive insurance industry because of factors that businesses can take into account. 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 have to review your credit every two years, and if your credit improves, then they have to give you a better rate based on your best credit,” Egan says.
She also pointed to a 2019 Maryland Insurance Administration report which found that “use of credit results in lower premiums for significantly more policyholders than those who experience higher premiums due to credit.”
Both bills had hearings on February 17. The House Economics Committee removed Wells’ bill from a voting list on Monday to give the panel time to consider two amendments. A provision, from the National Council of Insurance Legislators, would allow consumers to seek compensation 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 many factors insurers may consider when determining a person’s premium in Maryland, but they can be important. According to an analysis of Wells’ legislation by the Department of Legislative Services, an insurer that uses an applicant’s credit history can discount or impose a surcharge of up to 40% depending on the individual’s score. .
Vermont lawmakers were told in 2017 that a ban on using credit scores would cost the average motorist $33 more per year.
The Washington state insurance commissioner last month passed a rule banning insurers from using credit scoring for three years after COVID-19 financial protections end, money.com reported.
The ban follows a 2020 study by the Consumer Federation of America, which found good Washington state drivers with bad credit pay 79% more for mandatory car insurance than drivers. with excellent credit.
“I just don’t think it’s fair for good drivers to punish them if they’ve had credit problems,” Gov. Jay Inslee (D) said, according to The Associated Press. The Washington state ban goes into effect Friday.
A proposal similar to Wells’s died in committee in 2019 and 2021.
Asked if she was worried some motorists would pay more if her legislation passed, Wells said the insurance industry was too dark to draw any firm conclusions. “It’s like a black box,” she says. “There’s not enough (information) outside of the black box to understand what’s really going on.”
Normally, legislators 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.