Washington State Insurance Commissioner Mike Kreidler joined Jay Inslee at his press conference yesterday to advocate the ban of credit information for insurance decisions. I remember 10 years ago when Kreidler wrote an op-ed in the Seattle Times pushing this same, tired policy, and I blogged a response. Here we go again.
If failed policies like this get implemented, they will actually have the opposite impact that the politicians are trying to achieve, with collateral damage along the way. Iâ€™ll explain why, but first, letâ€™s look at why the policy is failed to begin with.
Banning Credit Scores is a Failed Policy
You can read Kreidlerâ€™s case here. His overarching point is that insurance should be issued based on the number and amount of claims youâ€™ve filed – â€œbut what does your credit information have to do with how you drive your car or maintain your property?â€
The reality is that credit scores ARE predictive of insurance losses, and they may be as strong a predictor as someoneâ€™s driving record itself. If they werenâ€™t predictive, insurance companies wouldnâ€™t use them.
And it makes sense â€“ if you have strong credit, you are responsible with your finances and possessions, and itâ€™s reasonable that you would be more likely to be careful on the road as well. Youâ€™re more likely to take care of your house or car. Youâ€™re less likely to file a fraudulent claim. Youâ€™re going to pay your bill on time and not miss payments, which is costly for insurance companies.
The free market can solve this problem â€“ the government doesnâ€™t need to step in here. If credit scores really werenâ€™t predictive of insurance losses, any insurance company is free to remove this criterion on their own accord. They could charge low rates to people with poor credit and gain a ton of market share. If these folks were truly lower risk, they would make a fortune in profits and put the insurance companies that use credit scores out of business.
So that brings us to Kreidlerâ€™s second argument, that credit scores are racist.
The claim that credit scores are racist has been proven false numerous times. The Federal Reserve has done studies on credit scoring and found: â€œOur results provide little or no evidence that the credit characteristics used in credit history scoring models operate as proxies for race and ethnicity. The distributions of credit scores for different racial or ethnic groups or across genders are essentially unaffected by the reestimation or redevelopment of the baseline credit scoring model in any of the race- or gender-neutral environments. This suggests that credit scores do not have a disparate impact across race, ethnicity, or gender.â€
In Kreidlerâ€™s blog, thereâ€™s more intellectual dishonesty here. He shows statistics where minorities are more likely to have a lower credit score. Just because different races have a different average credit score doesnâ€™t make them inherently racist.
From Kreidlerâ€™s blog, hereâ€™s his graph on credit scores by race:
By the same logic, SAT scores must also be racist. And, using Kreiderâ€™s logic, SATs are racist to the benefit of Asian students.
The reality is that credit scores, SAT scores, and other objective measures arenâ€™t inherently racist but reflect the different choices by demographics. We should ensure equal opportunity, but itâ€™s foolish to try to achieve equal outcomes.
If you dig beneath the surface, you can find reasons for the disparity in measures like SAT scores and credit scores. Take single-parent households for example. Clearly, itâ€™s more challenging for single-parent households to raise kids and accumulate wealth. Itâ€™s hard enough with two parents! But when you look at the distribution of single-parent households, there is a big disparity by race.
And part of this is driven by government incentives. If the government really cared about improving the lives of the poor and minorities, they would create policies that encourage two-parent households and stable families.
Producing the Opposite Result of What is Intended
Ideas have consequences. And bad ideas have victims. Banning the use of credit scores in insurance underwriting is a bad idea and will harm Washington residents.
First, if you remove the ability to use credit scores, rates are going up for everyone. Insurance companies will lose a key variable in determining underwriting risk, and thus will need to charge everyone more. Get ready for thousands of dollars of increased premiums.
When insurance rates go up, fewer people can afford insurance. For some, that will mean losing mobility and having to take the bus or walk â€“ certainly not the outcome Kreidler was hoping for.
But worse â€“ there will be more uninsured drivers, which will further raise rates, as there will be fewer people paying premiums to cover the losses.
Finally, some companies could decide itâ€™s not worth the risk to do business in Washington State and pull out of the market entirely. The impact is reduced competition and higher premiums as well.
Each of these is a vicious cycle â€“ each factor will continue to drive rates higher, reduce competition, and increase uninsured drivers.
We need to wake up and see these virtue-signaling policies for what they are â€“ policies that score political points and make some people feel woke, but actually do more harm than good.
What Should Kreidler do Instead?
I reached out to Kreidler back in 2015 when my insurance company violated their Washington State insurance charter by adding an illegal surcharge to my auto premium. I complained all the way up to the Washington state manager and got nowhere, so I reached out to Mike Kreidlerâ€™s office for help.
My experience was horrible â€“ they did nothing to help me and immediately took the side of the insurance company. So, I got a lawyer involved and beat both Mike Kreidler and the insurance company. The insurance company sent me a refund, with interest, for their illegal surcharge, and agreed to refund all Washington State residents they had similarly overcharged. It was a big win â€“ but Mike Kreidler didnâ€™t have anything to do with it.
If Kreidler really wanted to improve lives for the residents of Washington State, he should advocate for them. When he receives a complaint, he should put the full force of his office to investigate it. This has a bigger impact on those lower on the socioeconomic ladder that may not be able to afford a lawyer.
I asked the WA OIC for comment on the following:
1) If the Dept believes that credit scores produce discriminatory results, why recommend banning their use in only some lines of insurance, but not others?
2) Credit scores are one of many social determinants of health (SDOH): which other SDOH is the Dept looking at banning in WA?
3) Lemonade Insurance argues that its algorithmic AI eliminates racial bias; most states have agreed, and admitted the company; since WA is one of the few states which has not, is it safe to say Commissioner Kreidler disagrees that AI can fulfull this promise?
I never heard back. I would also add the following:
4) If the WA Ins Dept believed the use of credit scores was discriminatory and actuarily unjustified, it was within the Deptâ€™s power NOT to approve such rates each year they were filed: why did it allow the practice to continue?