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Words by Al Woods
Auto insurance is all about risk. Taking out insurance basically means that you are paying the insurance company to take on the risk of an accident or accident. Insurance companies set premiums based on a variety of risk factors, such as driving history, where you live, and the type and age of the vehicle you drive.
However, some of these factors are not related to driving behavior or environmental risks such as natural disasters. Gender and credit score have long been used as factors in determining insurance rates, but some states now ban the practice.
Photo by Evgeny Tchebotarev on Unsplash
Why Insurers Use Gender and Credit Score
So why have gender and credit score been the criteria for insurance premium rates so far?
When it comes to gender, one of the reasons comes down to the underlying statistic for assessing claims risk. Statistically, women drive less than men and are less likely to get into a car accident, get caught driving drunk, or get ticketed. has been statistically proven to behave Therefore, women tend to get cheaper car insurance than men. The policy has been criticized for being sexist. Not only is gender equality becoming a bigger and more mainstream issue, but the move toward nonbinary her gender recognition could soon include a third gender option on state identification cards. means that there is This will change the way insurers assess gender-related risks.
A credit score is used by insurance companies to assess an individual’s likelihood of paying off a loan, credit card payment, or other financial obligation. A low credit score can make you appear unreliable to your lenders and insurance companies when it comes to paying your bills. One of the reasons insurance companies’ use of credit scores has been criticized is because some feel it unfairly discriminates against economically disadvantaged people. This is especially true for minorities. People of color have less access to intergenerational wealth and proportionally lower credit scores, leading them to take advantage of subprime loans that charge much higher interest rates.
States Banning the Use of Gender and Credit Scores
The following states prohibit the use of gender in determining insurance rates:
- California
- Hawaii
- Massachusetts
- Michigan
- Montana (first banned the use of gender information in 1985, but recently rescinded the ban in 2021)
- north carolina
- Pennsylvania.
The following states prohibit the use of credit score information:
- California
- Hawaii
- Maryland
- Massachusetts
- Michigan
- Oregon
- Utah
- Washington
Regulatory impact on premium rates
So, would banning gender and credit rating information make a difference in premium rates?
It depends who you ask. Overall, men pay more for car insurance than women, regardless of whether the use of gender information is prohibited. For example, Kristine Lee of The Zebra points out that while the overall gap in premiums between men and women is fairly small for adult drivers, the gap between male and female teenage drivers is much larger. .
Other studies show that in states where the use of gender information is prohibited, men pay about 6% more for auto insurance than women. In states where it’s not banned, the difference is closer to 10%. Either way, women’s car insurance will be cheaper, but there’s a clear shift in how much.
looking to the future
Will more states ban factors like gender and credit score in the future? Insurers are beginning to shift away from factors such as gender and focus on risk factors that drivers can control. Also, the discriminatory undertones of using credit scores as a risk indicator for insurance are likely to become less popular and increasingly de-emphasized by insurers.
Of course, some standards are unlikely to change anytime soon, even though they have nothing to do with driving behaviour. For example, living in an area prone to natural disasters such as floods and tornadoes always increases the risk of high insurance claims. Living in a dense urban area means a higher chance of vandalism and car theft. Needless to say, more traffic and more pedestrians and bicyclists on the road mean more accidents.
As gender and credit information lose their relevance to premiums, insurers will most likely compensate by more accurately assessing other risk factors. For example, technologies such as telematics trackers and AI/machine learning will allow insurers to more accurately measure risk based on driving behaviour.
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