One of the most hotly debated underwriting factors in auto insurance, an applicant’s credit history continues to be used significantly in crafting policy rates. For independent agents and brokers, that means explaining the sometimes foggy connection between credit history and driving risk.
A new report from WalletHub may make that task easier, however. Researchers at the consumer finance consultancy looked into how, where and why credit matters to auto insurers, and just which carriers are relying on the underwriting factor the most.
Credit score by carrier
WalletHub researchers evaluated the nation’s top five auto insurance carriers by creating two hypothetical consumers, one of whom has excellent credit and the other, who has no credit. All other factors remained the same.
Allstate seems to be the insurer that leans most heavily on credit data. The report reflected a 116% fluctuation in premiums, while
State Farm—the least credit-reliant—fluctuates just 45% when it comes to credit score.
Farmers Insurance was the second-most credit reliant, with an 83% fluctuation, followed by Geico (56%) and Progressive (47%).
In terms of transparency, researchers determined Progressive was most up-front about their use of credit score as a rating factor, while
Liberty Mutual ranked last.
Credit score by state
Geography also mattered when it came to credit history and an insured’s bottom line. While credit score had an average 65% differential in cost nationwide, some states relied on the underwriting factor more than others.
Credit data had the most impact in the District of Columbia, with a whopping 126% fluctuation, and the least in Vermont (18%). Other highly credit-reliant states include Wyoming (114%), Indiana (110%) and Maine (109%).
On the other end of the spectrum are Montana (24%), New Mexico (26%) and North Carolina (26%).
California, Hawaii and Massachusetts were not included in the lineup as state laws prohibit some factors, like credit history, from being incorporated into auto insurance ratemaking.
Should credit be used at all?
The use of credit history as an underwriting factor is very hotly debated among those in the industry. If you listen to J. Robert Hunter, Director of Insurance for the Consumer Federation of America and former Texas Insurance Commissioner, all underwriting variables other than driving-related factors are unfair.
“Actuaries must look for some logical connection to risk,” Hunter said. “Good classifications have both correlation and a good thesis—they need to logically relate. Let’s get rid of these factors that make rates go up for poor people for the benefit of the rich.”
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