Policy Documents

Effect of Credit Scoring on Auto Insurance Underwriting and Pricing

Dave Pavelchek and Bruce Brown –
January 1, 2003

In 2002 the Washington State Legislature passed ESHB 2544, restricting the use of credit scoring in personal lines of insurance underwriting.  ESHB 2544 also directed the Insurance Commissioner to produce two studies, on the effects of credit scoring before and after ESHB 2544. To conduct the first study mandated by ESHB 2544, the Office of the Insurance Commissioner hired independent research and consulting services – PRR, Inc, and Washington State University’s the Social and Economic Sciences Research Center, affiliated with Washington State University.

Three insurance companies each provided data on several thousand randomly chosen consumers. The insurance company data included

  • age,
  • gender,
  • residential zip code,
  • date policies started, and
  • credit scores and/or rate classifications.

About 1,000 of each firm’s consumers were contacted by phone.  The phone survey gathered information about

  • ethnicity,
  • marital status,
  • income level, and
  • for 212 people whose policies had been cancelled because of low credit scores, information about how cancellation affected them, and how difficult it was to find replacement insurance.

Each of the three insurance companies used a different credit -scoring model.  Only one insurance company had cancelled policies solely because of credit scores, and that practice had already been discontinued when the study began.

The purpose of the study was to find out whether credit scoring has unequal impacts on specific demographic groups – not to determine whether low credit scores correlate with higher loss ratios, or whether the use of credit scoring is inherently fair or unfair to individual consumers, or how accurate credit history information is.

This study has very specific limitations:

  • Because practices vary widely from one insurance company to another, findings about credit scoring in one firm may not apply to others.  Principal variations include:

- The credit scoring model used;

- The population to which it is applied, andEffect of Credit Scoring on Auto Insurance Underwriting and Pricing 

- The role of credit scoring in setting rates and assigning consumers to risk pools.

  • Insurance companies vary in the way they set rates for people who do not have enough credit history to compute a credit score.  Some companies view this as a negative factor, while others consider it a neutral factor.
  • Certain ethnic groups in Washington have relatively few older people, making it difficult to compare them with other ethnic groups in the same age range.
  • Washington has a low overall percentage of people of color, which limits the accuracy of the data for specific ethnic groups such as Native Americans.
  • The study was based on records of insurance company customers, so it does not provide information about people who were refused insurance based on credit scores.
  • This study does not examine whether the credit information used to set rates is accurate.