When you shop for new homeowner, renter or car insurance, the insurance company might consider your personal credit history to calculate the score that determines your premium.
Insurance companies create customer scores to predict future exposure during the underwriting and rating process. Insurers believe a direct link exists between a consumer’s credit history and the likelihood of filing future claims and the potential cost of those claims. Insurers argue that credit-based scores are more accurate indicators than driving records, which can be wiped clean. To minimize their anticipated losses, insurance companies charge higher premiums for consumers with low credit scores.
But there are limits on what insurers can use for credit-based scores: States can limit the use of personal information such as race, ethnicity, religion, gender, income or postal ZIP codes.
Opponents of credit-based scoring argue that the process is not transparent enough and disproportionally rates consumers with low income and people of color as higher risks. As a result, these groups have lower insurance scores and pay higher premiums. But even consumers who have perfect credit histories or often make purchases using cash can score lower because they don’t have enough credit history to prove financial stability. Several states—Alabama, Delaware, Florida, Illinois, New Mexico, Oklahoma, Texas, Vermont and Washington—prohibit using a lack of credit history as a factor for insurance premiums.
If a credit history is available, many states allow insurance companies to use it if it is not the sole factor for determining premiums.
Recent State Actions
At least 10 states considered legislation addressing the use of credit information in insurance during the 2022 session. A New Jersey bill would prohibit automobile insurers from assigning consumers to a rating tier based on education, employment, profession, credit score or any credit report information. Louisiana introduced a similar bill. A proposed Maryland law would have allowed consumers to file for a reasonable exception on auto insurance rates if their credit history was negatively impacted by personal hardships.
Other states, including California, Hawaii, Maryland and Massachusetts, already restrict the use of credit information in insurance. Hawaii’s statute prohibits the use of credit ratings in auto insurance policies. Maryland prohibits homeowners insurance companies from refusing coverage, canceling a policy, refusing to renew a policy or basing rates on a consumer’s credit history. However, auto insurers may use credit history to help determine rates on a new policy.
In 2021, Colorado restricted insurers’ use of any external consumer data and information sources, as well as any algorithms or predictive models that use external consumer data and information sources in a way that unfairly discriminates based on race, color, national or ethnic origin, religion, sex, sexual orientation, disability, gender identity or gender expression. The law requires the state insurance commissioner to adopt rules for the specific types of insurance and to implement the law after holding stakeholder meetings with industry and consumer organizations.
After a previous rule was overturned, Washington state’s insurance commissioner temporarily banned credit-based insurance scoring for three years, starting in March 2022. The American Property Casualty Insurance Association, the Professional Insurance Agents, and the Independent Insurance Agents and Brokers of America jointly sued the state over its ban, arguing that it deprives consumers of a competitive private market.
Credit-based insurance scoring is an important issue to consumers, insurers, regulators and legislators. NCSL maintains a database of state statutes addressing the use of credit information in insurance.
Dana Braeunling was a 2022 intern in NCSL’s Fiscal Affairs Program. For more information, please contact Heather Morton.