San Antonio Express News: What's a credit report got to do with how well someone drives?

This article was first published on the San Antonio Express News Website. Read the original article here.
Author: Michael Taylor, The Smart Money S.A.
First published Aug. 17, 2021

What’s a fair way to price auto insurance?

The question stems from a personal financial setback.

My 16-year-old daughter got her driver’s license this month, which I just learned will double our household automobile insurance premiums. We previously paid $678 every six months but will now pay $1,276 every six months.

Yay.

Now I know where I’ll spend the automatic child tax credit I was so happy about two weeks ago.

This egregious pricing is typical for youthful drivers, who are guilty until proven innocent from the perspective of insurance companies.

Another guilty-until-proven-innocent factor used by auto insurance coverage is credit scores. The worse or thinner your credit, the more you pay.

This is counterintuitive. Why should people with a flawless driving record pay more for insurance because they were late on their credit card bill or just don’t have a credit record? Driving and using credit responsibly are clearly separate skills.

The practice of using credit scoring in insurance products and pricing is the subject of an active debate at the federal and state levels. In Congress, both New Jersey Sen. Cory Booker and Michigan Rep. Rashida Tlaib have proposed banning it.

The insurance industry argues the historic correlation between lower credit scores and a higher number and higher dollar value of damage claims justifies the use of credit scoring in pricing.

In Texas

In June, entrepreneur Nestor Hugo Solari moved his startup auto insurance company, Sigo Seguros, to Austin and launched a new program in the state targeting the Spanish-speaking population.

One of Sigo Seguros’ selling points is that it does not consider personal credit scores when underwriting insurance. It considers the practice discriminatory, especially against Spanish-speaking Texans. To further appeal to its target audience, the company will not require a traditional state driver’s license, either. Customers can provide a foreign driver’s license and still receive coverage without any surcharge.

The typical customer for Sigo Seguros, according to Solari, seeks liability-only coverage and may forgo collision coverage because they drive older, less valuable cars.

I’ve previously written about this, but from a personal-finance perspective, I favor this flavor of auto insurance. We need solid protection against catastrophic liability. But we don’t need protection against car damage because, for personal finance reasons, people shouldn’t drive valuable cars. Especially, I hasten to add, with a new 16-year-old driver behind the wheel.

I decline to insure against damage to my 2009 Hyundai, which has a trade-in value of maybe $2,000. At that kind of value, what’s the point of damage insurance? The thing is nearly worthless on purpose, just the way I like it. So I save a little by declining collision coverage, as do many Sigo Seguros customers.

I asked Solari about his issue with credit scores. He pointed out that the Spanish-speaking Texans his company seeks to serve may have thin or no credit files because of recent immigration status or because the community is relatively under-banked compared to native English speakers in the state.

I confirmed with my auto insurance company that it considers personal credit when determining my premiums. Texas insurance rules allow credit scoring as a factor for pricing as long as it’s not the only factor considered. Some states, including California and Massachusetts, have banned personal credit as a factor because of potentially discriminatory effects.

Other factors also matter, such as miles driven, car density as measured by ZIP code and driving record.

In theory, what is a fairer method for pricing auto insurance?

Critics of the use of credit scoring argue that observed driving behavior and driving record is what should count most. They have a point as well.

Enter Big Brother

In recent years, auto insurance companies have experimented with telematics, which provide data directly to the companies on customers’ driving style based on a phone app that tracks everything from acceleration and hard-braking to late-night driving and texting while driving.

Sigo Seguros offers a discount for customers who sign up for its mobile-phone based telematic system, seeing it as a better way to measure driving risk.

I was interested to learn this because I enrolled about a year ago in an app that offers a discount for letting my insurer track my driving experience. My insurance company’s app even reports to me about my sudden braking and phone use while driving. It’s probably tracking overall miles driven as well.

This kind of driving data strikes me as quite fair, because it measures factors that could increase the likelihood of auto accidents that credit scores, for example, do not. This is the ultimate goal — fairness in auto insurance based on observed risky behaviors. And fairness is good.

The downside of telematics is that Big Brother — in the form of my auto insurance company — is watching me as I drive.

This makes me paranoid about my ability to get away with crimes in the future, which is a real negative. On the plus side, I get 3 percent annual savings on my auto insurance premiums!

We are now paying through the nose because of my teen driver. Eventually I will need to rob banks just to pay for the auto insurance, but the auto insurance telematics will increase my likelihood of getting caught. A classic Catch-22.

Speaking of Big Brother watching, and as a total aside, I have really enjoyed the idea that Bill Gates can track my every move since I got the Pfizer vaccine against COVID-19.

You know what’s nuts about that worry in particular? We all carry smartphones everywhere! That is the actual tracking device recording all our movements. It’s not the vaccine. Please, for the love of McKenzie Scott and all that is beautiful in this world, get vaccinated if you haven’t already.

Michael Taylor is a columnist for the San Antonio Express-News and author of “The Financial Rules for New College Graduates.”

michael@michaelthesmart

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