Auto Insurance Credit Scoring

When you shop for your auto insurance policy in Oregon, there are specific "underwriting standards" - the rules. Insurance companies use these rules to decide whether to insure you and in order to set their rates for your insurance coverage. These rules are about you and about how the insurance company can use this information to evaluate you, or each driver, risk factor. The risk factor of each driver is basically how likely are you to make a claim, or how likely you are to have an accident. Drivers with the least risk are preferred because they are least likely to file a claim.

The information auto insurance companies use to assess a driver's "risk" are not limited to your driving record.

Yes, your driving record is significant as is the driver's age, the type of car you drive, how much you drive, and your prior insurance coverage history. In Oregon, your personal consumer credit history is also used by insurance companies to assess your risk, and in order to determine your auto insurance rates.

The practice of auto insurance using your consumer credit history to assess you as a risk factor is known as "credit scoring" and it is controversial for many reasons. Oregon and each state in the USA determines these rules in that state for auto insurance underwriting standards.

Oregon has placed limits on the use of your personal consumer credit history in setting these auto insurance rules for "underwriting standards" that auto insurance companies may use in determining your auto insurance policy and rates.

For instance, Oregon does not allow an insurer to use a current policy holder's credit score to raise their insurance rate when it is time to renew the policy. Oregon law also does not allow insurers to cancel nor to refuse renewing an insurance policy, because of the consumer credit score. Oregon allows insurers to use your personal consumer credit history only when you are a potential new policy to that company.

Oregon requires that insurance companies also prove that the credit score is not the only criteria in the system they use to determine a driver's risk and set their policy rates. Oregon also requires that the insurance company tell you how they will use your credit history information and they must notify you before they run a credit check. If the insurance company uses your credit history in determining either to not insure you or to not offer you the best rates, they must provide you with the specific reasons for their determination.

Oregon Credit Scoring and Rate Categories

The insurance rating categories are Preferred, Standard and Nonstandard. Nonstandard are the drivers considered the highest risk and they usually pay the highest rates. Oregon Insurance Commission - Learn More

Credit Scoring – Some of the Recent Controversy

Credit scoring controversy heated up in 2001 when a well known think tank released a report for the insurance industry on credit scoring. This report made the growing adoption of using credit scoring both more publicly known and also provided information to the industry on how it was being used.

This research and 113 page report is still available for $1250.00 (one thousand, two hundred fifty dollars), titled: 2001: Insurance Scoring In Personal Automobile Insurance - Breaking the Silence.

It seems that the terms "insurance scoring" and "credit scoring" are used interchangeably. What is insurance scoring? Conning defines this term as a score derived from credit report data that has been determined to be highly predictive of future claim costs. Insurance scoring or insurance scoring models as discussed in this study are not synonymous with credit scoring as used in the loan underwriting process in the banking industry to predict loan defaults. Fair Isaac and Company Inc. (referred to throughout this study as "Fair Isaac") is the pioneer in credit scoring and insurance bureau scores. Insurance and credit scoring models have proliferated throughout the financial services industry during the 1990s.

Credit scoring is considered by some to be unfair business because the use in auto insurance conflates whether you are a safe driver with your bill payment history. Insurance companies have responded to this argument by saying lower credit score drivers are more likely to file a personal injury claim and that the credit score is a predictive information metric. However, since the insurance is there for the purpose of filing this claim, the social economic bias about the credit score and the insurance rate determined in part by the credit score is apparent.

Another controversial aspect of credit scoring is that our consumer credit scores are becoming more unreliable with the amount of identity theft on the rise. In addition, with identity theft a huge problem, the privacy issue of our credit history being used by another corporation are also a heated problem because the more our private information is exposed and used, the more our personal information becomes available making us an easier target for identity theft.

Voters in Oregon voted in 2006 to not to completely ban the use of credit scoring, but Oregon in 2003 had voted in some protections for consumers for how credit scoring could be used in determining their insurance policies. Measure 42 in 2006 was the first measure of it's type in the USA.

In 2003, the Legislature prohibited insurance companies from using the credit information of existing policyholders to decide whether to raise rates or drop a policy. Ballot Measure 42 would take the restrictions further. [...] Critics of credit scoring say it targets lower-income people and minorities, who tend to have poorer credit histories. And many critics say it is done without a clear understanding of the customers affected. At least 18 states have considered clamping down on the practice in 2006.

Oregon voters consider insurers' use of credit scores

According to Eugene's The Register Guard, Oregon's Measure 42 was the first of it's type in the USA and, "will help protect the poor and minorities from unfairly paying more for insurance because of poor credit scores, backers and consumer groups say. Insurance companies have mounted an aggressive campaign to defeat the measure, putting up $3.5 million to date."

Maryland has very strict laws on the use of credit scoring – and in 2010 Maryland attempted to ban credit scoring completely for the use in new auto insurance policies. The 2010 attempted ban failed.

Currently, Maryland prohibits homeowners insurers from using credit information in underwriting or rating. The law also prohibits private passenger automobile insurers from using credit information for underwriting, but allows such information in rating new policies within 40 percent rate collars—either a surcharge or discount of up to 40 percent, he said. The proposed bills would have gone even further and repealed provisions of Maryland's law authorizing insurers to use credit information to rate a new automobile insurance policy, he said.

Md. Rejects Bills Banning Use of Credit Scoring

Michigan is another state that has tried to fight the use of credit scoring with a big state decision in July of 2010 where the Michigan Supreme Court ruled in a 4-3 decision that credit scores can be used to set insurance rates. This was an interesting case of the insurance industry suing the Michigan Insurance Commissioner for the State Constitutionality of their insurance underwriting rules specific to the use of credit scoring.

Linda Teeter, Executive Director of Michigan Citizen Action, has been leading the charge over the issue. She says the ruling will have a detrimental impact on drivers with credit issues. She said that in this economy many Michigan residents are facing economic peril as a result of the collapsed economy, job losses and layoffs. The result of the ruling, she said, could be to provide a person with a poor driving record a lower premium than some one with a good record.

"As an example, some one who has a DUI (Driving Under the Influence) or an OUI (Operating Under the Influence) and a good credit score can pay less than some one with a perfect driving record and a challenged credit history," Teeter said.

The Use of Insurance Credit Scoring In Automobile and Homeowners Insurance - A Report to the Govern or, the Legislature and the People of Michigan

In a dissenting opinion, Justice Marilyn Kelly, "argued that the majority was ignoring the plain text of Michigan law, noting that the stated purpose of the state Insurance Code is "to provide for the continued availability and affordability of automobile insurance and homeowners insurance in this state and to facilitate the purchase of that insurance by all residents of this state at fair and reasonable rates."

Washington state in 2010 also had a similar attempt to ban credit scoring use, but the effort died in the legislature. According to Washington State's Official Insurance Commissioner and state government website:

Commissioner Kreidler is asking the state Legislature to ban insurers' use of credit scores when determining how much you pay for auto, homeowners or renter insurance.

The bill had a hearing in the Senate on Jan. 14. ( The Senate Committee on Business, Financial Services & Trade voted on an amended bill on Feb. 15 that Kreidler does not support. Watch a March 2 podcast about the amended bill featuring Commissioner Kreidler: The Fight to Stop the Use of Credit Scores to Set Insurance Rates (