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How do credit scores punish Detroit residents when paying for auto insurance?

January 28, 2015 by Steven M. Gursten

WalletHub study shows one reason why Detroiters pay more: Allstate charges 116% more to consumers with poor credit; Farmers, Progressive & State Farm all charge more

auto insurance and your credit score

If your credit score is poor, it will cost you more.

Last week I was interviewed by Bloomberg News on the cost of auto No Fault insurance in cities like Detroit. In the story, I explained how the ugly use of credit scoring is a double whammy for people who live in cities like Detroit, a community that can afford it least, and I compared the use of credit scoring to legalized discrimination.

A new study, “2014 Car Insurance by Credit Score Report” by the consumer website WalletHub, now adds further support for this argument.  The study looks at four of the largest auto insurance companies in Michigan – Allstate, Farmers, Progressive and State Farm – and how all four insurance companies charge considerably more for No Fault auto insurance to consumers with poor credit.

In its study, WalletHub made the following startling findings about the “extent to which credit data” and “credit scores” affect “insurance policy pricing”:

  • Allstate had “a 116% fluctuation in premiums between a consumer with excellent credit and a consumer with no credit.”
  • Farmers’s premium fluctuation between consumers with “excellent credit” and “no credit” was approximately 80%.
  • Progressive’s premium fluctuation between consumers with “excellent credit” and “no credit” was approximately 48%.
  • State Farm “display[ed] a 45% premium fluctuation” between “a consumer with excellent credit and a consumer with no credit.”

To conduct its study, WalletHub “collected premium quotes from the websites of five of the largest insurance providers in the United States” for “for two hypothetical consumers, identical save only for their credit history. More specifically, one consumer has excellent credit while the other has no credit history.”

Credit scoring in Michigan

Michigan auto insurance companies use drivers’ credit scores and credit information as factors in determining how much to charge drivers for auto insurance. This is called credit scoring.

Debates about the pros and cons of credit-scoring by auto insurance companies in Michigan are not new.

In 2004, former Insurance Commissioner Linda Watters implemented an administrative rule that prohibited Michigan auto insurance companies using consumers’ credit scores to determine how much to charge them.

Shortly thereafter, Michigan’s auto insurers – through their trade group, the Insurance Institute of Michigan – successfully sued to invalidate the credit-scoring prohibition. In a 2010 opinion, the Michigan Supreme Court ruled that the Insurance Commissioner “exceeded her authority by enacting a total ban on a practice [credit-scoring] that the Insurance Code permits,” thus allowing the unfair, discriminatory practice.

As recently as 2013, credit-scoring, again, became an issue.

In House Bill 5000, which was introduced on September 24, 2013, by Rep. Alberta Tinsley Talabi (D-Detroit), it was proposed that an auto insurer’s use of “credit scoring” in setting auto insurance prices would be deemed “an unfair method of competition and an unfair or deceptive act or practice …” To date, no action has been taken on the bill.

Related information:

8 things to know about how Michigan auto insurance companies can use your credit score

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