by Shauna Sowersby

Washington State lawmakers are considering a proposal to eliminate the use of credit history to increase insurance rates or to determine premiums when renewing personal insurance. 

SB 5010 is just one of the measures being considered as part of Gov. Jay Inslee’s “package of proposals that address systemic racism.” The bill seeks reforms to insurance policies such as auto coverage, homeowners insurance, and earthquake insurance.

Sen. Mona Das (D-47, Kent) is the prime sponsor of the bill. Last month, she testified to the Senate Committee on Business, Financial Services & Trade that low-income households, specifically in communities of color, are most likely to be negatively affected by credit scores. 

Additionally, the bill would help the people who have lost their jobs or had their businesses affected by the COVID-19 pandemic, Das explained. 

“Many of these folks will see credit scores go down as they struggle to pay their bills and manage their credit,” she told the committee. “To penalize folks with increased rates or restricted access to coverage just because their credit history suffered during this challenging time is inequitable, it’s unfair and really makes no sense.”

Studies from the Federal Trade Commission and the Consumer Federation of America, among others, have shown that people who live in communities of color and those living in low-income households are far more likely to pay higher insurance premiums, even if they have clean records. 

In addition, the CFA study showed that everything else being equal, “safe drivers with poor credit pay 79%, or $370, more on average than a driver with excellent credit,” statewide. 

“Black, brown and also poor white Washingtonians occupy the bottom rung of our economic hierarchy,” said former Seattle City Council candidate Shaun Scott, who testified on behalf of the Poverty Action Network. 

“We already suffer higher interest rates for home and auto loans and for credit cards than people who have means. We also pay higher rates of insurance for reasons that really don’t have much to do with our insurance risk,” Scott said. “The discriminatory practice of using credit scores to determine insurance rates really compounds both problems and I think amounts to a poor tax on some of our most vulnerable populations.”

Representatives from the Center for Economic Justice, Habitat for Humanity and AARP of Washington State also testified in favor of the bill.

Perhaps unsurprisingly, the insurance industry came out against the reforms; groups like the National Association of Mutual Insurance Companies, Progressive Insurance and Independent Insurance Agents and Brokers of Washington testified on the no side.

Kenton Brine, President of the Northwest Insurance Council argued against the idea that credit scores are being damaged during the pandemic. He said that, in fact, credit reporting agencies say credit scores have been rising due to current changes in people’s behavior, such as not opening new lines of credit.

He also pushed back against the idea that insurance companies penalize people. “What they [insurance companies] are actually doing is competing with each other in the marketplace, and the more information they have at their disposal to tie rate to risk allows them to compete in the marketplace and offer more products and services to people at better prices,” he said.  

However, Steve Valandra, Deputy Commissioner for Public Affairs and Tribal Liaison for the Office of the Insurance Commissioner, told PubliCola this is just another way of justifying the use of credit scores as an indicator of risk.

“That’s a racist policy,” he said. “They [insurance companies] didn’t use credit scoring twenty years ago, they did just fine and they made money. If they want to use other factors, then they should use other factors that make sense, such as how you drive your car. That to us is the better way to assess risk rather than throw in a credit score into all the proprietary algorithms they have to determine a premium.”

During his testimony, Brine offered a different approach to reform that the industry argues would address some of the systemic issues: Allow insurance companies to “consider people’s extraordinary life circumstances and address those issues individually.” In other words, he argued, when consumers encounter major life issues such as divorce, military deployment, or even a pandemic, people would have the ability to notify their insurance agent of an upcoming change to their credit history in order to avoid any changes to their premium. 

The last time the state legislature took action to change how insurance companies use credit history was almost two decades ago when lawmakers passed legislation that put limits on how companies could determine premiums for instance, mandating that medical bills, types of credit, and number of credit inquiries cannot be used to deny insurance coverage or to determine rates. 

For now, the CARES Act, a federal program passed last March in response to the pandemic, does offer some protections for consumers who have been impacted by COVID, but those are set to expire 120 days after the pandemic is no longer considered a national emergency. Under the CARES Act, creditors must report outstanding accounts to credit reporting agencies as current, as long as the consumer has made a payment arrangement with the creditor and as long as the customer stays caught up on their monthly payments

The Biden Administration is looking for ways to rehabilitate the credit scoring system as well. Two of the proposals include creating a public credit reporting agency, and tackling credit reporting inaccuracies, but critics still say the measures don’t go far enough. 

Das’ bill passed out of the Senate Business, Financial Services & Trade Committee earlier this month with bipartisan support. Sen. David Frockt (D-46, Seattle) was the only committee member to cast a vote against the bill’s passage during the executive session. The measure is currently waiting for leaders to move it to floor and onto the House.