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Thursday, April 14, 2016 12:08 am

Bill would ban credit-based insurance rates

This chart, based on data from Consumer Reports, illustrates the difference in auto insurance premiums based on credit scores in Illinois.
Image courtesy of Consumer Union.

Illinois could put a stop to the use of credit scores to calculate auto insurance rates.

The bill is pending in a legislative committee and faces strong opposition from insurance trade associations in support of using credit as a rating tool.

In Illinois, credit is one of many commonly used factors to determine what premium a consumer pays to insure a vehicle. Sen. Jacqueline Collins, D-Chicago, believes credit is not a reliable tool and that its use adversely affects African-American and Latino communities.

“Why should insurance rates be based on a person’s credit score and not solely on a person’s driving record?” Collins said. “I see this as a way to circumvent directly discriminating against race, religion or sex, but it is still adversely impacting the lower-income communities.”

Credit is used to analyze risk in many areas in our lives, but is it an effective tool for insurance rating? Representatives of the Property Casualty Insurers Association of America, a national trade association for insurance companies, think so.

California is one state which uses a rating model that does not consider credit scores, a system Collins would like to see adopted in Illinois. Even though California’s insurance scoring system is different, Mark Sektnan, president at the Association of California Insurance Companies, believes that credit is a reliable rating tool and provides a cost savings for consumers.

“People fail to realize that there’s a difference between a person who has a problem getting credit as opposed to someone who has a low credit score,” Sektnan said. “In California, the three mandatory factors include the mileage, age and driving record, and they are the least efficient markers for determining risk.”

Jeffrey Junkas, assistant vice president of state government relations at Property Casualty Insurers in Illinois, told Illinois Times that credit-based insurance scores are just one of many factors used when determining premiums.

“For example, an 18-year-old with no credit or a senior citizen who has paid off all debt and hasn’t had any credit cards in a while would be categorized as neutral,” Junkas said. “In this case, credit wouldn’t be a factor at all.”

Collins said that the issue was brought to her attention by a 2015 article by columnist Eric Zorn in the Chicago Tribune, titled “What does my credit rating have to do with my driving?”

Zorn argued that in Illinois, price optimization is all a part of how the automobile insurance industry does business, and credit is just one of the factors used to do that – factors like what kind of phone a person uses or how likely they are to seek out a better deal.

Zorn found that in Florida, a credit score could mean a large difference in payment.

He noted a study from Consumer Reports in Florida, indicating that “a poor credit score boosts annual auto insurance premiums by $2,417, but a drunken-driving conviction boosts those premiums only $865.”

Junkas points out that insurance companies are already heavily regulated and have to abide by existing consumer protection laws.

“It is a misconception that low-income people have low credit scores,” said Junkas. “Someone like Donald Trump who has filed bankruptcy three or four times may have more strikes against them on their credit – more so than a person who just has a low credit score.”

Senate Bill 2208 was introduced in January and is currently pending in the Senate Insurance Committee.  

Contact Brittanny Hilderbrand at intern@illinoistimes.com.

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