Car insurance should be priced to reflect the risk of the driver getting into an accident. But in Maryland, insurance companies use non-driving related factors — including education, occupation, marital status, homeownership and credit — to set the rate that a driver pays for insurance. This allows them to determine who might be a more profitable customer in the long run, rather than someone's risk on the road, and it leads to some perverse outcomes.
Research this year from the Maryland Consumer Rights Coalition (MCRC) found that a driver living in Roland Park with two at-fault accidents would pay $215 less than a driver with a perfect record who lives in Park Heights. Common sense tells us that someone with a spotty driving record should pay more, but insurance firms' pricing policies mean that bad drivers in wealthier ZIP codes pay less. And these kind of pricing policies have a disparate impact on communities of color. A 2015 Consumer Federation of America (CFA) study found that good drivers living in predominantly African-American ZIP codes in Baltimore City are charged nearly double ($1,060) the policy rates of those drivers living in predominantly white neighborhoods ($640).
While auto insurers use many non-driving related factors to drive up the cost of car insurance — for example the death of your spouse can increase the cost of your car insurance by 14 percent — your credit history stands out as one of the most dramatic ways insurance companies cheat good drivers. The Maryland Insurance Administration (MIA) allows insurance companies to charge drivers with poor or even "good" credit 40 percent more than drivers with "excellent" credit. Insurance companies argue that credit is an important factor by alleging a correlation between credit scores and risk, but they are loath to explain why this would be. If a series of medical bills puts a ding in your credit score, do you suddenly become reckless on the road? Of course not. If that were the case, then the drop in millions of drivers' credit scores during the Great Recession would have sent auto insurance claims skyrocketing.
Insurers also argue that people with lower credit scores file more claims. This is the insurance lobby's attempt at misdirection. Insurers make perfect drivers with less-than-perfect credit scores pay more than those with the highest credit score for even the basic liability insurance everyone is required to purchase. That policy only covers accidents that you cause, so you're not filing claims under these policies. The industry's theory about the claims behavior of people with lower credit scores is simply untrue.
A 2015 study by Consumer Reports found that a good driver with poor credit pays $1,636 more than a driver with excellent credit but a drunk driving conviction. By prohibiting the use of credit and other non-driving related factors when setting auto insurance rates, insurance companies will have to set their premiums based on actual driving factors so drunk drivers and those with accidents will pay more for their car insurance, while good drivers pay less.
In the next month, the Maryland General Assembly has an opportunity to make things right. In 2002, the Maryland General Assembly prohibited the use of credit in setting home insurance rates. In 2011, the Maryland General Assembly agreed that credit should not be used for hiring and compensation decisions. Legislators have determined over the past 14 years that good credit, while an important goal, should not affect the cost of home insurance or access to employment. This year, Sen. Catherine Pugh introduced Senate Bill 1028 which prohibits the use of credit, education, occupation, marital status and homeownership from use by insurance companies in setting auto insurance rates.
Passing SB 1028 will reduce the cost of insurance for many good but low-income drivers throughout the state. It will reverse the current practice in which drivers in low-income and communities of color subsidize wealthier drivers and drivers living in predominantly white communities. And it will mean that insurance will be based on how you drive, not who you are.
Marceline White is the executive director of the Maryland Consumer Rights Coalition; her email is Marceline@marylandconsumers.org. Tom Feltner is director of Financial Services for the Consumer Federation of America; his email is firstname.lastname@example.org.