Joint legislative study looks at the use of credit scores in setting car insurance premiums

Lawmakers heard testimony from members of the insurance industry, consumer advocacy organizations and citizens Tuesday as they examined an issue many Oklahomans may not be aware of—how insurance companies use credit scores and other financial information, including buying habits, to decide a policy holder’s car insurance rates.

The study was requested by Sen. Rob Standridge and Rep. Bobby Cleveland. Standridge said Oklahoma has the highest percentage of uninsured drivers in the nation. Even though Oklahoma’s cost of living is among the lowest in the nation, car insurance rates are among the highest. Standridge said after Consumer Reports magazine did a 2015 article about the use of credit information in setting insurance rates, he was approached by people in the insurance business and customers who were concerned about the practice and how that impacted the cost.

Joe Woods from Property Casualty Insurers was among those testifying at the hearing. He told lawmakers that several studies have shown that an individual’s credit history is a proven, accurate indicator of how likely that person is to file a future claim and the potential cost of the claim. He said the way people manage their credit reflects how likely they are to behave in other aspects of their lives. By using the scores, companies can better match the risk of loss with premiums. He pointed to numerous studies, including one by the University of Texas which affirmed the use of credit information.

“They also found that credit based prediction is more predictive than even driving record. It is one of the top three to five predictors of risk that an insurer can use,” Woods said.

Woods also pointed to Arkansas which has been collecting data since the mid 2000’s on the use of credit for determining insurance scoring. A 2015 report by their state’s insurance department said that 79.4 percent of consumers either received a discount for credit or it had no effect on their premium.

Charles Bell, Programs Director for Consumers Unions, the advocacy and policy division of Consumer Reports, gave legislators a different perspective on the issue. He said at the national level, Consumer Reports found that single drivers paid a median of $190 more for merely having good credit, compared to consumers with the best credit. Those with “poor” credit paid $1,200 more. In Oklahoma, the top insurers report an average rate of $3,872 for auto coverage for consumers with a clean driving record and poor credit compared to an average rate of $2,198 for drivers with a drunken driving conviction and excellent credit.

“We believe it is patently unfair and unwise to let convicted drunk drivers pay less for their auto insurance than an excellent driver with poor credit,” Bell said.

Lawmakers heard that the credit score insurance companies use are not the same thing as a FICO credit score, and that different insurance companies may use different formulas for determining a customer’s score. Standridge said simply having certain kinds of credit cards, like department store cards, can lower a person’s insurance score, noting most consumers would be surprised to learn something like that can impact their insurance rates. He pointed to the case of a Moore tornado survivor who saw his rates skyrocket after taking out department store credit cards to replace items that were destroyed. He was told those credit cards were the reason for the increase.
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Standridge said insurance companies are authorized by state law to use credit information in setting rates, but questions whether some may give more weight to that than the number of tickets or accidents a driver has had.

“It’s causing people with bad credit scores but excellent driving records to wind up paying more for insurance than someone with a DUI who has excellent credit,” said Standridge, R-Norman. “We heard from one gentleman today who used cash for everything for years, but was shocked when his car insurance rates suddenly jumped 28 percent in one year. He was told it was because he didn’t use credit cards and that had adversely affected his credit score. That doesn’t seem right.”

He said he was also concerned about the use of something referred to as “price optimization.” Insurance companies can obtain data indicating if a person routinely shops for the best price before making a purchase or is willing to change a service provider for phones or TV to get a lower price. If not, the insurance company may charge that person a higher price because their consumer data indicates they’ll simply pay it.

“I think that’s not a very good practice in a regulated industry like that. Obviously if you go to a retail store and you are willing to pay more, that’s one thing, but they likely have no idea how their purchasing history may impact their insurance rate.”

Cleveland said before the study took place, he talked to hundreds of Oklahomans about the fact that insurance companies can use credit information to set car insurance rates.

“Not one person knew or was aware of that and high income or low income, all thought it was unfair,” said Cleveland, R-Norman. “I’m not ready to throw it out, but I think it could use some tweaking.”

Cleveland said it was important to make sure people with low incomes aren’t taken advantage of. He said he would like to know how much weight was given to a person’s credit in setting rates.

Standridge said at the least there should be more transparency in how rates are set. He said he would continue to gather information and possibly work with the Oklahoma Insurance Department to look at possible changes to improve the process.