Americans are facing one of the most difficult economies in recent history. Life becomes more difficult every day for many of Connecticut’s families. Stories we hear from our constituents illustrate lives turned upside-down with job losses and the struggle to meet the most basic needs. The high cost of auto insurance adds considerable roadblocks to working families that need to rely on automobiles to get to their jobs.
We question auto insurance companies’ practice of underwriting policies and rates based on applicants credit scores because it is an unreliable indicator of risk and future claims. While studies have shown no evidence that suggests that credit scores serve as proxy for race, evidence indicates that certain classes of people are disparately impacted and thus the practice has a discriminatory effect.
While credit-based insurance scores are predictive of an insured’s future claims experience, claims tend to be minor compared to those with good credit. Those with low credit scores were more likely to file a claim for a broken window compared to others that would avoid the claim and pay out-of-pocket.
Credit scores are also a poor source of reliable information. In May of 2008, Florida’s Insurance Commissioner, in testifying in front of the Subcommittee on Oversight and Investigations of the House Committee on Financial Services, rightly stated that 50% of credit reports contain errors. He went on to say that credit reports treat unfairly individuals with recent divorces, recently naturalized citizens, the elderly, the disabled, those with certain religious convictions, and individuals who have not established credit histories.
Minorities are disproportionally affected by the practice of underwriting based on credit scores. For example, a Texas Insurance Department report in 2004 showed that African Americans’ average credit scores trailed Caucasians by 10% to 35%, while Hispanics’ average credit scores also were 5% to 25% below Caucasians. In addition, because some religious groups are not able to use credit because of their beliefs, these people are also more affected than the general population.
As the economy continues to sink and foreclosures continue to grow, people will find it more difficult to gain access to affordable auto insurance, particularly in our cities where people already pay higher rates. This alone should serve as an impetus to stop the practice of using credit scores as a determinant for underwriting auto insurance.
Rep. Kelvin Roldán and Rep. Hector Robles, two Democrats from Hartford, recently introduced legislation to change this practice.