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Public Interest Law Professor John Banzhaf

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Drivers with Bad Credit May Soon Pay Higher Premiums, Predicts John Banzhaf

Insurance Premiums for Drivers with Poor Credit History May Soon be Raised, Based Upon a New Study Which Shows It's Not Unfair to Blacks or Poor to Base Auto Insurance Rates on Credit History, and That Such Credit-Based Ratings are Not Just a Subterfuge (Proxy) for Discriminating on the Basis of Race and/or Poverty, says Public Interest Law Professor John Banzhaf

Washington, DC, February 14, 2016 --( Drivers who, regardless of income, have a good credit history are now being forced to pay far more and subsidize drivers who, regardless of income, have bad credit, claims public interest law professor John Banzhaf.

But this may soon change, says Bazhaf, because a major new but still unpublished study shreds the argument behind laws in most states prohibiting or limiting companies’ ability to charge bad credit risks more; i.e., that credit based insurance scores are just a subterfuge (proxy) for discriminating on the basis of race and/or poverty.

The study, awaiting publication, is entitled Do Credit Based Insurance Scores Proxy for Income in Predicting Auto Claim Risk?, says Banzhaf.

As the study notes, Banzhaf says, virtually all states now restrict or condition the use of credit-based insurance scores (i.e., scores such as FICO's derived from credit history information) in raising auto (and often homeowners') premiums, or in deciding whether to deny, cancel, or refuse to renew a policy.

In addition, the study documents, says Banzhaf, three states - California, Hawaii, and Massachusetts - completely ban the use of such scores in rating auto insurance, and two states - Maryland and Massachusetts - ban the use of these scores in rating homeowners' insurance.

These restrictions on companies using credit information in setting auto insurance premiums - as they may now use factors like age, type of car, driving history, etc. - are based on arguments that the scores are just a subterfuge (“proxy”) for discriminating against drivers on the basis of race and/or poverty, the study says, according to Banzhaf.

But this new study - the first to use the best income measure - shows clearly that this is factually incorrect, says Banzhaf. Insurance scores, the study proves, he notes, are not in any way proxies for race or income, and, like age and driving history, serve a valuable function in helping predict which insured are more likely to have accidents.

So, in most states where companies cannot base rates on such scores, those who are responsible consumers and maintain a good credit rating are forced to pay higher rates and thereby subsidize those who, as indicated by their scores, are more likely to have - and in fact do tend to have - costly accidents, the authors claim, according to Banzhaf.

It's as if auto insurers could not take into account factors like age, and could not charge middle-aged drivers less than teens, even though the latter have a much higher rate of accidents, explains Banzhaf, one of the country's best known consumer advocates.

In interfering with the free enterprise system under which companies are free to set rates based upon the actual experiences of different categories of drivers - provided they do not use prohibited factors such as race - legislators mislead by so-called consumer advocates are unfairly forcing responsible drivers to pay far more than they should, and to subsidize bad drivers who have poor credit-based scores, Banzhaf says.

Based upon the argument that credit histories either do not help predict accidents or are simply a proxy for discriminating on the basis of race or income, virtually all states prohibit companies from making accurate predictions based upon credit, and thereby setting rates based upon actual risk, the study shows, according to Banzhaf..

But, backed up with this new data which incorporates a much more precise measure of income than prior studies, it is likely that automobile insurers will now try to change the laws so as to permit them to make more accurate risk predictions, and seek to mobilize the majority of voters who have good credit histories (andd logically object to paying higher rates than they should), in doing so, argues Banzhaf.

As the study argues, insurance scores are predictive of risk because they operate as a rough measure of policyholders’ responsibility or level of caution, says Banzhaf.

Prof Banzhaf maintains that it’s high time personal responsibility came back to auto insurance.
Contact Information
George Washington University Law School
Public Interest Law Professor John Banzhaf
202 994-7229 // 703 527-8418

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