THE SECRET SCORE BEHIND YOUR RATES

Because insurance companies are under no obligation to tell you what score they have cooked up for you, you have no idea whether you have a halo over your head or a bull’s-eye on your back for a price increase.

Car insurers didn’t use credit scores until the mid 1990s. That’s when several of them, working with the company that created the FICO score, started testing the theory that the scores might help to predict claim losses. They kept what they were doing hush-hush. By 2006, almost every insurer was using credit scores to set prices. But two-thirds of consumers surveyed by the Government Accountability Office at about the same time said they had no idea that their credit could affect what they paid for insurance. Even today, insurers don’t advertise that fact. They usually won’t tell you what your score is; they don’t have to. If a sudden drop in your score causes them to raise your rates or cancel your policy, you’ll receive a so-called adverse action notice. But those notices “provide only cryptic information that’s of limited use,” says Norma Garcia, senior attorney and manager of the financial services program at Consumers Union, the advocacy arm of Consumer Reports.

California, Hawaii, and Massachusetts are the only states that prohibit insurers from using credit scores to set prices. In those states, insurers base premiums largely on a consumer’s driving record, the number of miles driven per year, and other factors. According to a 50-state study of insurance regulations by the Consumer Federation of America in 2013, California’s pricing practices, enacted as part of Proposition 103 in 1988, saved $8,625 per family during those 25 years.

You buy car insurance so that you’re protected financially in the event of a car crash. But an unfair side effect of allowing credit scores to be used to set premium prices is that it effectively forces customers to dig deeper into their pockets to pay for accidents that haven’t happened and may never happen.

For example, our single New Yorkers with good credit scores and clean driving records would pay an average of $255 more in annual premiums than if they had excellent credit scores. In California, those same drivers wouldn’t have to pay a penalty for having only “good” credit.

In the states where insurance companies don’t use credit information, the price of car insurance is based mainly on how people actually drive and other factors, not some future risk that a credit score “predicts.”

That pricing dynamic also artificially reduces the true sting of careless driving in states like New York. If you have an accident, your premium takes less of a hit because you have already paid for the losses that your merely “good” score predicted you would have. In California, the $1,188 higher average premium our single drivers had to pay because of an accident they caused is a memorable warning to drive more carefully. And the more carefully people drive, the safer the roads are for everyone. In New York, our singles received less of a slap, only $429, on average. 

During the Great Recession of 2007-9, legislators in states across the country became alarmed that the ailing economy’s impact on credit scores would jack up their constituents’ insurance costs. They scrambled to strengthen “extraordinary life circumstances exceptions” in state laws that allow insurers to set prices based on credit-score information. Partly as a response, 29 states adopted so-called NCOIL (National Conference of Insurance Legislators) provisions. Many of them allow consumers to request that their insurer not use credit scoring against them if they were affected by circumstances beyond their control, such as unemployment, divorce, serious illness, the death of a spouse, and identity theft.

But the provisions are weak. For one thing, “notification of extraordinary life circumstances exceptions is not required under most state laws,” says Neil Alldredge, senior vice president of state and policy affairs for the National Associate of Mutual Insurance Companies (NAMIC). And it’s not clear whether insurers adequately make consumers aware that those exceptions even exist.

Amica, which has more than 670,000 policies in force, said it receives only one such request per month. State Farm, the nation’s largest insurer, told us it can’t say how many requests it gets or how many are granted. “But I can tell you those numbers are small,” said Dick Luedke, a spokesman. “We are talking, after all, about ‘extraordinary’ life events.” Representatives from NCOIL and NAMIC said their organizations don’t keep track. 

You share the road with an estimated 30 million uninsured drivers, according to the Insurance Research Council. Although every state except New Hampshire mandates that drivers have insurance coverage, some slip through the net of state enforcement by buying coverage to register a car, then letting it lapse.

It’s easy to demonize those consumers by assuming that they choose not to buy a product they can easily afford. “There are individuals out there who like to live on the edge” and drive without insurance, says an Allstate Web video.

But insurance credit scoring, which links customers’ premium prices to their creditworthiness, raises the cost of insurance for some low-income drivers and might make it unaffordable to them. In fact, research by the Consumer Federation of America found a strong correlation between state poverty rates and the percentage of uninsured drivers in a given state, which ranges from 4 percent in Massachusetts to 26 percent in Oklahoma. 

What’s worse, our own data show that when the uninsured try to get back on track and buy coverage, insurers tack on an additional price penalty. Our single policyholders who had a 60-day lapse in their coverage got socked with a $207 higher premium on average nationally. The penalty varied by state and ranged from zero in California to $834 per year in Michigan.

Insurers, however, dismiss the problem and say that insurance is plenty affordable for the poor. “Low-income consumers already spend more on alcohol and tobacco products or audio and visual equipment and service than they pay for auto insurance,” says the National Association of Mutual Insurance Companies.

Taxing the poor through credit scoring and by other means not related to driving causes problems for all insured drivers, because painfully high insurance prices tempt financially strapped consumers to drive without insurance. That, in turn, is why we recommend uninsured/underinsured motorist protection, which covers your losses caused by another driver who has insufficient or no car insurance. UI/UIM insurance added $10 to $230 per year to our single drivers’ bill, on average, depending on the state.