Should Credit Scoring Be Used to Set Auto Insurance Rates?

For those of you who don’t know, Massachusetts is in the process of dragging its insurance system out of some sort of strange, almost pre-Thatcherite British collectivist era, and into the modern American economic hurly-burly that marks pretty much every other part of consumer life. Today’s Boston Globe has an interesting little article on the contretemps over the insurance commissioner’s willingness to allow auto insurers, in bringing marketplace competition into that market, to use credit scores in underwriting or setting premiums. The critics hold that insurers should not be allowed to use this information at all, on the thesis that it discriminates against low income purchasers of insurance. Could be, but maybe not: the article doesn’t exactly present any objective evidence as to this one way or the other. But what was interesting to me is that its focus on credit scores makes it appear as though reliance on socioeconomic data in rate setting in Massachusetts’ auto insurance market would be some sort of departure, and for the worse, from past practices that existed under Massachusetts’ prior regulatory auto insurance pricing system. Although auto insurance and pricing for it isn’t my gig, my recollection is that, even under the prior system, rates varied depending on the consumer’s zip code, or at least on where in the state they lived and garaged their cars. There is little doubt in my mind that place of garaging led to lower rates in wealthier communities, and thus the place of garaging approach similarly structured auto insurance pricing on the basis of income levels. That may or may not be a good thing, but one thing is for sure: the proposal to do it now through credit scoring isn’t some break from a past in which income levels were not a factor in setting rates. The only thing different is that now it would be a declared factor, in the form of credit scoring, if critics are right that scoring runs in tandem with income level (which may or may not be true), rather than hidden from sight by means of rate setting on the basis of location of residence.