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Credit-Based Insurance Scores

Last Updated 1/31/2024

Issue: Insurance companies often use consumer credit information in determining if they will offer a consumer automobile or homeowners insurance policy and how much that policy will cost. A credit-based insurance score is a rating based in whole or in part on a consumer's credit information. Credit-based insurance scores use certain elements of a person's credit history to predict how likely they are to have an insurance loss. Credit-based insurance scores were introduced by the Fair Isaac Corporation (FICO) in the early 1990s. FICO estimates approximately 95% of auto insurers and 85% of homeowners insurers use credit-based insurance scores in states where it is a legally allowed underwriting or risk classification factor.

Overview: Insurers use credit-based insurance scores primarily in underwriting and rating of consumers. Underwriting is the process by which the insurer determines whether a consumer is eligible for coverage and rating is the process that determines how much premium to charge a consumer. The credit-based insurance score models used by insurers are designed to predict the risk of loss. Insurers use credit-based insurance scores for underwriting to assign consumers to a pool based on risk and then for rating by deciding how to adjust the premium up or down.

Insurers argue that the use of credit-based insurance scores is necessary to properly evaluate risk and charge rates to individual policyholders that most closely align with their true risk. They also note that not using credit-based insurance scores could result in lower-risk individuals bearing some of the costs from higher-risk individuals.

Typically, states will not allow credit-based insurance scores to be used as the sole basis for increasing rates or denying, cancelling, or not renewing policies. Some states prohibit credit-based insurance scores being used as the sole basis in underwriting or rating decisions and some require insurers to notify applicants or insureds that adverse credit-related decisions have been taken regarding pending applications or existing coverage based on the consumer's credit score. Currently, California, Hawaii, Maryland, Massachusetts, Michigan, Nevada, Oregon, and Utah ban insurance companies' use of credit-based insurance scores in determining policy rates or offering or renewing a policy. Washington Commissioner Mike Kreidler issued an order in 2022 to prohibit insurance companies from using credit scores to set policy rates on auto, homeowners, and renter's insurance for the following three years but this ruling was overturned by a state court before going into effect.

Consumer groups continue to have concerns with the use of credit-based insurance scores, including the fact that most consumers do not understand the concept of credit-based insurance scoring or how or why it works. Many consumers are not even aware that their credit characteristics are being used to create a score that will then affect their purchase of an insurance policy. Even if they have the knowledge of the existence of credit-based insurance scores, it is not intuitive for consumers to understand how credit-based insurance scores work or why they work.

Some groups allege that the use of credit-based insurance scores falls disproportionately on certain minority and low-income groups. Moreover, the use of credit-based insurance scores may not appropriately encompass unforeseen life events, such as the recent Covid pandemic. 

Status: State insurance regulators continue to monitor the impact of credit-based insurance scores on consumers. At the 2023 NAIC Spring National Meeting, the Transparency and Consumer Readability (C) Working Group and Property and Casualty (C) Committee both adopted and shared “Regulatory Resources for Consumers on Personal Lines Pricing and Underwriting – Auto Section,” which includes details and tips on credit-based insurance scores.

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Media queries should be directed to the NAIC Communications Division at 816-783-8909 or news@naic.org.

Aaron BrandenburgAssistant Director, P&C Regulatory Services
816-783-8271

Tim Mullen, Director, Market Regulation
816-783-8260

Randy Helder, Assistant Director, Market Regulation
816-783-8261

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