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Impact of Credit Scores on Auto Insurance Rates: A Controversial Practice

This article explores the use of credit scores by auto insurance companies to determine insurance rates and the criticism it has faced for unfairly targeting low-income customers. It also examines the potential of market failure due to asymmetric information and investigates alternative screening practices and technologies.

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Impact of Credit Scores on Auto Insurance Rates: A Controversial Practice

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  1. Using Credit Scores to Fix Auto Insurance Rates Cassandra Kubes PPPA 6085, Evening Session December 1, 2015

  2. Summary: • Article: “Consumers vent over credit scores leading to higher insurance prices” • Since the 1990’s, auto insurance companies have been using credit scores to determine insurance rates • Poor credit > higher premiums • Unfairly targeting low-income customers • Legal practice in all states, except CA, HI, MA • Oklahoma state senator proposing bill to make scoring practice illegal

  3. Average Premium Fluctuation by Company

  4. Unfair Practice or Combating Market Failure? • Insurers using credit scores to limit amount of asymmetric information • Market failure can sometimes occur with presence of asymmetric information that leads to adverse selection • Insurer remedies: • Screening potential customers • Denying coverage • Pooling equilibrium • Separating equilibrium

  5. Insurance Costs for Oklahoma Drivers:

  6. Insurance Pricing by Customer Group:

  7. Will Banning Use of Credit History Help? • Depends on how much each insurer relies on the credit history data to set rates • Look to CA, HI, and MA for example • Variety of other screening practices exist • New screening capabilities/technologies being introduced (i.e. usage-based insurance)

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