States are Banning Credit Scores as Insurance Rating Factors: How DRN Can Help

Insurance carriers use a number of data points when determining premiums on auto policies. These can include anything from age, marital status and places of residence and employment, to information about a person’s vehicle and how much they drive. Another common – but somewhat controversial – factor is credit score.

According to the U.S. government, a credit score is a number that rates credit risk. It can help creditors determine whether to give someone credit, decide the terms they offer, or the interest rate he/she pays. Having a high score can benefit an individual by making it easier to get a loan, rent an apartment, or lower insurance rates.[1]

Insurance companies in many states use credit scores as a factor in determining premiums as most carriers believe that credit scores are predictive of driver behavior. Analysis has shown that lower scores may correlate to riskier driving habits and a greater likelihood of having accidents, which leads to a higher rate of insurance claims. This has caused credit scores to be weighted heavily in the formulas carriers use to determine premiums.

However, privacy advocates say this correlation is hard to prove and is discriminatory toward individuals who are financially challenged. Washington is the most recent state to rule that credit scores cannot be used in determining and/or weighting premiums for auto, homeowner and renter insurance. 

(California and Massachusetts share this stance. Maryland allows credit scoring to determine rates on auto insurance only, while Hawaii allows credit scoring only for homeowner’s insurance. All other states currently allow credit scoring for all types of insurance.[2])

We believe this creates a strong argument for use of DRN’s license plate recognition (LPR) data. Our database of 20 billion license plate scans – and growing – provides vehicle information with time and date stamps. Our analytics platform then builds full stories of where vehicles have been and general areas as to where a vehicle spends most of its time. Because our data points directly to vehicles – not individuals or their credit – it’s outside privacy-related restrictions.

Insurance carriers can use our data at the underwriting stage to get predictive information similar to what a credit report could provide. We know that garaging – where a vehicle is kept – is effective in predicting location-associated risk and commonly used as a rating factor by insurers. This information is typically self-reported by the policy applicant and nearly impossible to verify without LPR data.

So while LPR data isn’t a rating factor on its own, it can be used to effectively validate other factors that are already in use, like garaging. There’s a proven lift in effectiveness of underwriting when using DRN data, and this can help fill the gap when credit scores aren’t available. We also believe if LPR data is used when writing policies and determining premiums more consistently, garaging will become a higher-weighted rating factor that insurers can rely on.

We don’t know if additional states will follow Washington’s ruling, but we’re ready to help. Contact us here to learn more.

Sources:

[1] https://www.usa.gov/credit-reports#item-213816

[2] https://www.opb.org/article/2022/02/01/washington-insurance-commissioner-adopts-credit-scoring-ban/

About the author:

Eric heads DRN’s Risk Solutions business development and strategic partnership efforts, shaping DRN’s solutions to align with the practices of insurance claims, SIU, underwriting and renewal. Eric brings more than 25 years of insurance industry experience and expertise to the DRN, including the launch of the Banking and Insurance Division of CARFAX. During his 10 years with CARFAX, he also earned the distinction of being one of five team members listed as patent-holder for the “use of automotive historical data within the insurance underwriting and rating process.”

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