KEY POINTS

  • Root Insurance will cease to consider credit scores on its insurance pricing models by the year 2025
  • Root said it wants to make auto insurance “fair” by basing rates on driving behavior
  • Credit scoring is used by the 15 biggest auto insurers in the country

An auto insurance company based in Columbus, Ohio, is taking a stance on what it claims is an unfair practice in the industry. Root Insurance, which operates in 30 states, said it will cease to consider credit scores on its insurance pricing models by the year 2025.

“For decades, the car insurance industry has used credit score as a major factor in calculating rates,” Root stated. “By basing rates on demographic factors like occupation, education, and credit score, the traditional car insurance industry has long relied on unfair, discriminatory biases in its pricing practices.”

Such practices, Root explained, “unfairly penalize” historically under-resourced communities, including immigrants, people struggling to pay large medical expenses, people with errors in their credit history information, and people who have suffered a financial crisis.

Relying on credit scores, the company added, also “disproportionately harms those who have been systemically discriminated against and reinforces the much bigger problem of inherent bias and systemic discrimination.”

Root said it wants to make auto insurance “fair” by basing rates on driving behavior.

“We believe your price should be determined by how well you drive, not who you are,” the company said.

Root noted it has never used a customers’ occupation or educational background as a factor in setting insurance ratings, since these factors can be distorted by systemic bias.

Instead, Root will focus on the use of telematics -- a vehicle-tracking device that can send, receive and store telemetry data – to determine driving risk.

“The best drivers should pay the lowest rates, and with the help of telematics technology, insurers are increasingly able to identify those drivers,” Root said.

A survey by Root revealed that 66% of Americans did not even know that credit scores were a factor in determining car insurance price.

"We know that we are the first major carrier to commit to eliminating credit scores from our pricing. There are a handful of smaller carriers who don’t use credit scores," a  Root spokesperson told International Business Times.

Removing credit scores is especially important now since the COVID-19 pandemic has led to massive job losses, evictions, and missed bill payments – all of which can harm consumers’ credit ratings.

The Zebra, an insurance comparison site based in Austin, Texas, found that people with low credit scores, even if they have clean driving records, are penalized at least $1,500 in annual premium payments.

The Zebra's 2020 state of auto insurance report reads: "Dropping credit score as a rating factor will affect auto insurance rates for nearly all drivers. Improving credit by even one tier can save consumers an average of 17% on their policies, so removing this will see a redistribution of these costs, making some consumers' policies cheaper and some more expensive."

Root noted that credit scoring for auto insurance is allowed all states aside from California, Massachusetts, and Hawaii, and are used by the 15 biggest auto insurers in the country and by more than 90% of all U.S. auto insurers. Since regulators and legislators establish how insurance companies set rates on a state-by-state basis, any new scoring model will be subject to regulatory or legislative approval.

“Eliminating credit scores is a major and necessary step toward dismantling archaic industry practices and making car insurance fairer,” stated Alex Timm, co-founder and CEO of Root. “We are committed to working with our partners, regulators and industry stakeholders to adopt this important change, and hope… others… join us in fighting discrimination, bias and systemic inequity in auto insurance.”

Tom Kuhn, Root’s director of communications, conceded the company has used credit scores to determine pricing, but that it still relies “far less on credit scores than most [companies] in our industry.”

The reason for the five-year time frame has to do with the complexity and difficulty of erasing credit scores from insurance underwriting.

“This isn’t easy,” Kuhn told Insurance Journal. “Credit scores have long been viewed by the industry and regulators as one of the most predictive indicators of risk. There is a lot of work to be done to implement the changes, get approval for those rates on a state-by-state basis and phase-in any impact to our policyholders.”

Kuhn added: “We also want to encourage the industry to move with us. This isn’t really only about Root -- it’s about making car insurance more fair and equitable, and we know it takes time for an industry to move.”

Root, which was founded in 2015, is currently a tiny player in the industry, accounting for less than 0.2% of the U.S. auto insurance market.

But Root’s decision came on the heels of a plea from the National Association of Insurance Commissioners, or NAIC, to address industrywide discrimination.

In late July, NAIC formed a special committee focused on racial issues in the Insurance industry.

“Within the NAIC, we’re seeing unprecedented discussions between our members and stakeholders on race and its role in the design and pricing of insurance products as well as our collective need to improve diversity in the insurance sector particularly in senior leadership roles,” said Ray Farmer, NAIC president and director of the South Carolina Department of Insurance.

However, some auto insurance companies determine creditworthiness differently than banks and lenders do. The so-called “credit-based insurance scores” places weight on such factors as length of credit history, and past payment history.

“There are significant differences between the more widely known credit scores used by lenders and credit-based insurance scores used by many, but not all, insurers,” said Dave Snyder, vice president of policy, research, and international at the American Property Casualty Insurance Association.

“Although both scores are derived from information found on credit reports, the information is measured differently. Only the credit information that is found to be the most predictive of an insurance loss is used for the insurance scoring models. This is because insurers are trying to predict the likelihood of future insurance loss. Lending institutions, on the other hand, use credit scores to determine the availability, amount and price of credit products offered to the consumer; they use them to determine the likelihood of repayment.”

Fred Lazar, an associate professor of economics at York University in Toronto, commented to International Business Times that he was not sure why credit scores were ever used in determining insurance rates.

“Perhaps, sometime in the past, some actuary did statistical analysis and found credit ratings to have some statistically significant power in predicting accident rates,” he said, “If so, then, someone else more recently may have done further statistical analysis and found this is no longer the case.”

Regardless, Lazar added that he thinks insurance companies can use other proxy variables (zip code, incomes, occupations, type of vehicle, race) to approximate credit scores.