New research from the Consumer Federation of America shows that the nation's two largest auto insurers, State Farm and Allstate, charge lower- and moderate-income drivers with poor credit scores much higher premiums than drivers with excellent scores, even as surveys that show a majority of Americans are against the use of credit scores for the pricing of insurance policies.

The CFA released its latest report, “The Use of Credit Scores by Auto Insurers: Adverse Impacts on Low- and Moderate-Income Drivers” yesterday at a live teleconference.

However, insurance experts say this announcement is nothing more than old news, minus a well-researched decision that credit scoring is a proven significant factor in determining which drivers may file a claim.

According to the CFA, a case study based on a driver who is a single woman with a clean driving record and no accidents, who is living in a moderate-income Zip Code in 10 major cities, and who purchases the minimum liability required by her state, faces an average 100% difference in premium costs depending on her credit score: that's about $563 vs. $1,277. The differences are greater for State Farm policies than Allstate; State Farm prices also tend to be lower than Allstate, the report states.

“That's a significant price difference for this driver as a result of her credit score,” says CFA Executive Director Stephen Brobeck. “Good, safe drivers in moderate-income areas are often charged more than other drivers from higher-income areas. The higher one's income, the higher one's credit score. But the ability to pay insurance premiums is not a factor here.”

Additionally, most Americans—more than two-thirds of those surveyed—feel that someone who's had difficulty paying debts should not automatically be charged higher auto insurance premiums, according to a 2012 survey by ORC International, in which 47% of respondents said it is “very unfair” and 20% said it is “unfair” for insurers to use credit scores in deciding an auto-insurance rate for a driver.

“We agree with a large majority of Americans that auto insurance should not be allowed to discriminate against low-income drivers,” Brobeck says. He adds that earlier CFA research has shown that most low-income households need a car, and pay more than $1,000 in annual premiums for necessary auto insurance, which causes higher auto insurance prices for drivers with less education and lower-status jobs.

In all states but New Hampshire, drivers are required to purchase liability insurance.

“There was nothing new in this press conference,” says Insurance Information Institute President Robert Hartwig. What was left out, however, is that credit scores are “highly correlated with expected loss” in both auto and homeowner's insurance, he says.

“And that correlation exists and has been determined in a way that is absolutely blind to income, race, and ethnicity, and that's because credit scores contain absolutely no information about income or other socio-economic or demographic factors,” Hartwig says. “They are entirely blind; it is absolutely the case.”

Such CFA reports tend to focus on urban areas, where the cost of insurance is higher than rural or suburban areas due to a higher frequency of accidents, a higher cost of accidents, and a higher frequency of litigation following an accident, Hartwig adds.

“Insurers have been using credit scoring for nearly two decades. Its use has been determined and accepted in 47 states,” Hartwig says. He contends the actual debate about credit scoring and its link to a greater number of accidents was settled decades ago, with many studies done in the late 1990s and early 2000s. “Why bring it up?”

The CFA looks at its findings as an opportunity to draw attention to credit scoring, and would like the 47 states that do use credit scoring to “follow the lead” of Hawaii, California and Massachusetts, which prohibit the use of auto-insurance rates based on credit, says CFA Director of Insurance J. Robert Hunter, who co-chaired the December 11 teleconference with Brobeck.

The use of credit scoring is unfair to the low-income working drivers “who struggle to survive financially partly because their auto insurance premiums are so high,” as auto insurance premiums can cost as much as 10% of a low-income client's disposable income, he adds.

“It makes worse other factors that drive up costs for low-income Americans,” Hunter says. “It is unfair and actuarially unsound.”

Hartwig, though, says, “If you were to ban the use of this credit information in underwriting criteria you would wind up, in effect, subsidizing individuals who cause a great cost on the system through a greater number of accidents.”

Robert Detlefsen, vice president, Public Policy for the National Association of Mutual Insurance Companies, agreed with Hartwig that the CFA's release lacked the full story, neglecting to mention the effectiveness of using credit scores in assessing the likelihood that a driver will file a claim. “The Federal Trade Commission, whose report is cited in CFA's own report, states that 'credit-based insurance scores are effective predictors of risk under automobile policies. They are predictive of the number of claims consumers file and the total cost of those claims,'” Detlefsen said in a released statement.

“If CFA understood the concept of adverse selection, it would know that if an insurer deliberately charged higher prices for low-risk consumers than for high-risk consumers, it would quickly become insolvent,” Detlefsen stated.

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