By Lloyd Marino
Here’s a quick quiz. Which of these has a greater impact on your insurance premium: a clean driving record or bad credit? Hint: The answer might surprise you.
In fact, auto insurance companies consider a wide array of factors when setting premiums, some of which don’t have anything to do with a person’s skill behind the wheel. In a groundbreaking report that looked at a whopping two billion car insurance quotes, the respected Consumer Reports found that a sterling driving record and claims history don’t necessarily have the impact that some of us have been led to believe.
Factors that directly impact premiums such as such age or disability are becoming less and less important as insurance companies become reliant on Big Data metrics like credit scoring. From State Farm to AFLAC, it’s no great secret that insurance providers rely heavily on credit scores. In all but three states – California, Massachusetts, and Hawaii – insurance companies consider a policyholder’s credit score when establishing what they pay for insurance. In the typical state that permits credit scoring, the rate differential between a consumer with excellent credit and one with bad credit was 49%, the CR study found.
But what made the Consumer Reports study so compelling is the scope of consumer data that insurers are using and how significantly it impacts policyholder premiums.
The study found that your credit score has a bigger impact on what you pay for insurance than a DWI conviction. Texas drivers with poor credit pay almost a $1000 more for car insurance than someone with a DWI conviction. Credit worthiness mattered most in Michigan, where premiums varied by 115%. On the other hand, credit scores mattered least in Connecticut, where there was only a 15% difference in rates, said CR.
The new measures have been fed into confounding scoring algorithms, CR found. Along with your credit score, auto insurers are now using a metric known as “price optimization,” which is another way of saying that they’re trolling though your data to make assumption about just who the hell you really are. Where you shop, your preferred brands, your buying habits, your education level, and even your Internet service provider are a few of the black-box factors that insurers are using.
What some find unseemly about the new metrics is the implementation of a pricing process that judges you less on driving habits, which should be paramount, and more on socioeconomic variables. Think of the poor guy who got sick and had to go on disability, or the young lady who lost her job after her company downsized but has an impeccable driving record. Should these folks be penalized for a circumstance beyond their control?
Predictably, the insurance industry is defending their use of these metrics, suggesting they correlate to a person’s level of risk. I’m not sure how they weigh education level exactly, but I’d be happy to remind insurance industry executives that the world’s wealthiest man is a college dropout. Also, how can a person’s shopping habits possibly be a better indicator of risk than speeding tickets, DWIs and accidents?
However, what concerns me is that all of this done in closed rooms. No one to my knowledge has seen these algorithms. And as CR pointed out, even they were available there’s no way to fix your standing in an insurer’s eyes since no two providers use data in the same way. Unlike a credit report, where you know across the board that late payments or too many open accounts will adversely impact your credit history, insurers use the data they collect differently, emphasizing any number of non-driving related variables that factor into the decision-making process. Farmers insurance, as an example, relies heavily on credit history, whereas Geico doesn’t pay in much mind at all, according to WalletHub.com.
Insurance industry transparency is another major issue in all of this. The CR study also looked at how easy it was for a Joe or Jane Consumer to find out if an insurance provider is accessing his or her credit information and using the data to determine pricing information. Progressive Insurance, for example, scores high on the transparency scale when it comes to using big data in quote generation (the source of that credit data). Liberty Mutual, by comparison, is more secretive than the KGB, scoring near the bottom, said CR.
No matter how you slice it, this is a lousy situation for consumers. First and foremost, insurers should be required to judge a person based on their actual risk. I’d much rather throw my money behind the mother of three with a clean driving record than a wealthy 40-year-old hedge funder who just racked up his third speeding ticket in 6 months. No doubt, the debate will continue, but it’s worth asking what, if any role big data metrics should have on what you do behind the wheel.