Michigan consistently ranks as the state with the highest car insurance rates in the country, at almost 80 percent over the national average.
That’s why Congresswoman Rashida Tlaib of the 13th District is making an effort to lower premiums. Her new bill would ban credit bureaus from providing consumer information to car insurance companies.
“It’s a discriminatory practice. It’s unfair, and we need to stop it,” says Tlaib, asking what credit scores “have to do with our driving record? Our driving history? Our likelihood of getting in an accident?”
She calls it a form of redlining, the controversial practice of raising rates on residents of a geographic area, often based on racial or economic lines. Critics have noted that minorities and impoverished families are hit harder with high insurance rates.
A report released by The Zebra, an insurance comparison website, last week revealed that Michigan drivers with poor credit pay $4,500 more, or 198 percent, in car insurance payments than those with exceptional credit, even if they’ve never had an accident or traffic ticket.
So, why are insurance companies allowed to set rates based off credit history? And is it a significant factor behind Michigan’s highest-in-the-nation auto insurance costs?
How do insurance companies use your credit history?
Erin Collins of the National Association of Mutual Insurance Companies, an industry association, says insurance companies don’t use credit scores, per se, to set rates. What they use is a “Credit-Based Insurance Score.” Collins says the main difference between the two is not the information gathered, but how that information is used.
“A credit score is like a snapshot of your credit in one point in time,” Collins says. “A credit-based insurance score is an insurance score, a numerical value, combining how certain elements of credit history predict insurance loss.”
It’s true: Credit scores do not reflect safe driving habits. But while Collins says credit scores indicate a person’s worthiness to open new lines of credit, insurance scores indicate a person’s likelihood of filing a claim.
“There have been studies after studies after studies trying to examine a credit-based insurance score and its relative correlation to loss,” Collins says. “And they all say the same thing, that not only is a credit-based insurance score highly predictive of loss, it’s one of the most, if not the most, predictive factor used in predicting loss.”
Are low credit scores tied to increased insurance claims?
A study conducted by the Bureau of Business Research in 2003 found a correlation (PDF download link) between low credit scores and insurance claims. Collins says because credit scores are so predictive of loss, if Tlaib’s bill becomes law, it would impair an insurance company’s ability to match rates to risk.
Collins adds that if the ban passes, the majority of insured motorists would end up subsidizing riskier drivers through increased premiums. But what the studies don’t explain is why the correlation between credit scores and risk of filing claims exist.
Tom Buchmueller, a professor of business economics and public policy at the University of Michigan, says there isn’t a clear answer to why the connection exists.
“It could be that it’s just a proxy for other personal characteristics,” Buchmueller says. “So people who are really careful about managing their finances might also be more careful in driving. It also could just reflect someone’s underlying economic situation.”
Is using credit history to determine rates fair?
Buchmueller says the use of credit scores raise fundamental issues of fairness and could be interpreted as a punishment against the poor, who might see insurance rates rise when they experience a drop in credit rating for non-driving related reasons.
“Somebody who has really good credit because they have higher income and greater savings, if they get into an accident they may decide not to file a claim,” says Buchmueller. “Whereas someone living paycheck to paycheck isn’t going to have that luxury. So, the credit score is predicting higher claims, not because you are irresponsible, it’s just that you don’t have the cash on hand to fix your car.”
For these reasons, supporters of Tlaib’s bill believe using credit history to determine rates is a form of discrimination.
How much weight do Michigan insurance companies give credit history?
But credits scores aren’t the only factor insurers look at when determining rates. They also consider age, residence, driving history and more. In fact, a Michigan Supreme Court ruling stops insurers from using credits scores solely as a factor to deny coverage.
And credit scores may not be the only solution to lowering premiums. Maine has the lowest car insurance rates in the country, according to Insure.com. And the average credit score in both Maine and Michigan is around 680 points.
Michigan residents are expected to receive a big cut in rates after Governor Gretchen Whitmer signed into a law a complete overhaul of the state’s no-fault insurance policy which will go into effect in July of 2020.