Credit has long been a controversial underwriting factor in auto insurance, but the exact degree to which a person's borrowing habits affect their final bill has remained a mystery to agents running quotes for their clients.
Now, a new report succests those without credit pay an average of 53% more for auto insurance than those with excellent credit scores.
The study, conducted by credit score website WalletHub, sought to determine how important credit data was to insurance underwriting, specifically auto insurance. For the study, WalletHub obtained quotes from five major auto insurance providers (Allstate, Farmers Insurance, GEICO, Progressive, and State Farm) for two hypothetical consumers—one with excellent credit, and one without credit.
Other things, the study's findings include:
Credit score by state
- In some states, those without credit can end up paying as high as 122% more for car insurance
- Farmers Insurance is the insurer that seemingly relies on credit data the most, causing a considerable cost disparity for customers across credit levels; GEICO uses it the least, as data suggests
- GEICO uses credit data in 59% of the states it operates in; Progressive uses credit data in all the states it is allowed to
- Travelers is the most transparent about its use of credit data in generating quotes; State Farm is the least
Geography also mattered when it came to credit history and an insured’s bottom line. While credit score had an average 65% differential in cost nationwide, some states relied on the underwriting factor more than others.
Credit data had the most impact in the District of Columbia, with a whopping 126% fluctuation, and the least in Vermont (18%). Other highly credit-reliant states include Wyoming (114%), Indiana (110%) and Maine (109%).
On the other end of the spectrum are Montana (24%), New Mexico (26%) and North Carolina (26%).
California, Hawaii and Massachusetts were not included in the lineup as state laws prohibit some factors, like credit history, from being incorporated into auto insurance ratemaking.
Should credit be used at all?
The use of credit history as an underwriting factor is very hotly debated among those in the industry. If you listen to J. Robert Hunter, Director of Insurance for the Consumer Federation of America and former Texas Insurance Commissioner, all underwriting variables other than driving-related factors are unfair.
“Actuaries must look for some logical connection to risk,” Hunter said. “Good classifications have both correlation and a good thesis—they need to logically relate. Let’s get rid of these factors that make rates go up for poor people for the benefit of the rich.”
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