Washington, D.C. – The Consumer Federation of America (CFA) and Center for Economic Justice (CEJ) praised Washington State Insurance Commissioner Mike Kreidler’s new consumer protection rule banning the use of credit scores for pricing auto, home, and renters insurance for a period of three years. This rule will prevent a sharp increase in premiums for many Washington residents whose credit scores will suffer when the federal CARES Act expires and consumers are suddenly required to repay debt that has not reported as delinquent for a year or more.
Based on research conducted by CFA using data acquired from Quadrant Information Services, LLC, auto insurers in Washington will raise rates on drivers by 79% on average if they have a poor credit score rather than an excellent credit score. Drivers whose credit score falls from excellent to fair see 35% increases in auto insurance premium on average in the state. These premium increases, which add up to hundreds of dollars, are charged to lower credit consumers even if they have perfect driving records, and they are also charged to homeowners and renters who have never filed a claim. Insurance credit scoring unfairly penalizes the most vulnerable consumers who have experienced the greatest financial disruption because of the pandemic.
“While Americans have been shielded from a lot of negative credit reporting during the pandemic due to forbearance rules in the federal CARES Act, when that protection expires, we could see millions of financially distressed Americans facing significant declines in their credit scores,” said Doug Heller, CFA Insurance Expert. “Commissioner Kreidler’s pro-active decision to make sure auto and property insurance rates don’t skyrocket for consumers just because their credit scores suddenly fall will be hugely beneficial when we finally move past the pandemic and on the road to recovery.”
The rule responds to the fact that the use of credit history for determining personal insurance premiums has become, as Commissioner Kreidler explains it, “degraded and unreliable” as a result of the pandemic. There are several reasons for this, including:
- the dramatic spikes in unemployment and long-term financial vulnerabilities caused by the pandemic,
- the change in rules regarding credit reporting during the pandemic, and
- the severe credit impacts consumers could face after the expiration of the CARES Act.
“While we have long believed that the use of credit scoring for insurance pricing is both unfair and disproportionately impacts low-income consumers and communities of color, the pandemic has totally disconnected credit history from whatever tether to risk that insurance companies have claimed in the past,” said Birny Birnbaum, Executive Director of CEJ. “Commissioner Kreidler’s action is a balanced approach that protects consumers with little or no market disruption while faithfully enforcing Washington’s unfair discrimination laws.”
CFA and CEJ noted that a recent Nevada regulation issued by that state’s Division of Insurance prohibited credit-based increases to insurance premiums for two years after the pandemic ends and requires refunds for policyholders who have seen credit-based premium increases since the pandemic began.
The Consumer Federation of America is an association of more than 250 nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education.
The Center for Economic Justice is a nonprofit organization that works to increase the availability, affordability and accessibility of insurance, credit, utilities, and other economic goods and services for low income and minority consumers. Birny Birnbaum, Director of CEJ, has been a designated consumer representative at the NAIC for nearly 20 years.