Credit scores, ZIP codes can drive up auto insurance
Advocates decry use of ZIP code, credit scores in determining auto premiums in New York
ALBANY — If you live in the Capital Region and have an excellent credit score, you’ll likely pay an average of $568 a year for auto liability insurance. If your credit is fair you’ll pay $866 and if it is poor you’ll pay $1,486, regardless of your driving record.
That’s because insurance companies use secret, proprietary algorithms or formulas to set rates that are based on more than an individual’s driving record.
Also included in these formulas is the customer’s ZIP code. And those in lower-income area codes where many Black and Hispanic drivers live, also pay more based on their location.
Those were the findings of a recent study from Consumer Reports and the Consumer Federation of America, whose researchers looked at rates across the state. The findings, based on August 2020 prices, have ignited calls for a crackdown on what advocates say are unfair insurance premiums.
“Your auto insurance premium ought to be based on your driving record not your credit score,” said Michael Delong, a researcher with the Consumer Federation of America.
The link between insurance rates and credit scores as well as ZIP codes is not new.
But the results of this study have underscored the level of disparity and given the issue a new depth, especially in some of the state’s poorest and most densely populated areas.
Statewide, annual liability rates for all New Yorkers with excellent credit are $730, compared to $2,097 for those with poor credit.
Broken down along racial lines, the differences grow even more stark.
In ZIP codes that are majority white, the average rates vary between $1,152 and $1,803 depending on whether one has excellent or poor credit.
But in ZIP codes where there is a majority population of color, that is Black or Hispanic drivers, the rates vary between $2,529 and $4,141.
“It’s really unfair,” said Chuck Bell, Consumer Report’s program director.
Rather than using well-known systems such as the FICO or Fair Isaac Corp. scores that are used in credit card or mortgage applications, insurance companies have their own secret systems of credit scoring.
That, combined with factors such as a person’s ZIP code and driving record, go into what advocates say is an opaque “black box” that remains secret because insurance companies say their formulas are proprietary and there is no requirement for them to disclose this information to customers.
“It’s not a score the consumer can obtain,” Bell said.
Insurance carriers say that their scoring systems have proven to be good predictors of what their claims will be with a given customer.Cassandra Anderson, vice president of the New York Insurance Association, Inc. said the Consumer Reports/ CFA study is flawed and that it cherry-picked data to support its conclusion.
“It fails to take into consideration the intricacies involved in pricing insurance.
Insurance prices are based on the actuarial probabilities of future loss,” Anderson said.
“Insurance companies base prices on the risk of having a loss — the lower the risk of loss, the lower an insurance premium will be for an insurance policyholder. Two strong indicators of loss are ZIP code and a credit-based insurance score, which is different than a credit score. Insurers take a comprehensive view of risk and only use factors that are indicative of risk,” she said.
One’s driving record alone is a poor indicator because that data can often be inaccurate, Anderson said. And driving incidents often go unrecorded.
As to the correlation between ZIP codes, or geographic location, she said that’s based in fact.
Urban areas typically have more traffic congestion, which increases the odds of accidents and theft.
Only three states disallow these types of ratings. When Washington state tried to ban the practice, rates went up for a lot of drivers. “Low risk drivers of every ethnicity and every income level saw premium increases,” Anderson said.
Dropping the credit component hit senior citizens particularly hard, since they typically have better credit, which should benefit their rates.
Washington’s ban on using credit scores was eventually halted in the courts.
Still, the use of credit scores can lead to some problems, especially if there is a glitch or error in one’s credit rating.
“The agent couldn’t explain what that meant,” Michael Avery said of when his insurance premium jumped due to an “F3 credit tier.”
Avery, 66, a Queens school bus driver, had been the victim of identity theft in which someone opened up numerous accounts in his name. That, in turn, impacted his auto insurance bill.
Some lawmakers in New York have introduced bills to ban the use of ZIP codes or credit algorithms in setting premiums but those efforts haven’t moved forward.
Brooklyn Democratic Sen. Kevin Parker and Buffalo Democratic
Assembly Majority Leader Crystal Peoples-Stokes last year offered legislation to halt the algorithms but the bills didn’t get out of the insurance committees.
“There’s an implicit bias there,” Parker said of the scoring system. “This is inherently unfair,” Stokes added.
For now, the best advice for motorists may be for people to
shop around for the best rate, since they can vary by carrier, those in the industry say.
“Insurance is highly competitive,” said Scott Holeman, spokesman for the Insurance Information Institute. “If you don’t like what you are getting, shop around.”