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State senator attacks insurance companies' use of credit scores to figure vehicle premiums

Tim Farley / Red Dirt Report
State Sen. Rob Standridge (R-Norman)
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Secret price gouge must be eliminated, Standridge says

OKLAHOMA CITY – Many consumers may not know that insurance companies use their credit score to figure premium amounts, but one state lawmaker wants to change that.

Sen. Rob Standridge (R-Norman) plans to introduce a measure that would eliminate a secretive charge known as price optimization. The bill also would require insurance companies to fully disclose all information used to calculate a consumer’s auto premium.

Price optimization is used by a “handful” of companies, but “doesn’t make any sense,” Standridge said.

Price optimization is used when companies believe a consumer’s credit score would allow them to pay an extra charge per month even if the assessment is not warranted by tickets or accidents. As a result, the extra charge is tacked onto the annual premium.

“They don’t tell you about his unless you ask,” the senator said. “There’s a few companies that do this in Oklahoma and just because someone can afford the extra charge doesn’t mean it should be assessed.”

Insurance companies also use a person’s credit score to calculate an annual premium, which is done in 47 states. However, the secret that insurance companies do not reveal is the insurance credit score, which is the sum total of several factors.

“What does that (credit score) have to do with a person’s driving record or having an accident. I will gladly sit down with the insurance department folks and talk about this,” Standridge said. “The original intent of doing this, I think, was to get the best rate for the consumer.”

The bill, which will be introduced during the next legislative session, has received mixed reviews.

“I’ve had some insurance agents tell me this needs to be looked at and others tell me to leave it alone,” Standridge said. “Outside of the insurance industry, everyone tells me we should change it and that credit scores should not be used to determine premium amounts.”

In some circumstances, a consumer might have lost a job and their car, but still has good credit and never had an accident, yet their premium could be much higher than a person with a DUI and an excellent credit score.

“That type of situation is skewed because the person paying more actually offers less risk because they’ve had not accidents or tickets,” the senator said. “Although most states allow this, I think we need to tweak it here in Oklahoma so it makes more sense. There’s also the idea of full disclosure by insurance companies. They need to provide a simplified graph or some type of informational chart that shows the various aspects of the consumer’s premium and how they figure it. Insurance companies don’t do that now unless you query them.”

Standridge was prompted to introduce the bill based on a concern expressed by a friend who also is an insurance agent. The issue was highlighted in a Consumer Reports article, which revealed single drivers who had good credit scores paid $68 to $526 more per year, on average, than similar drivers with the best scores, depending on the state they called home.

In addition, the publication also examined a scenario involving average new customer premiums for adult single drivers with clean driving records and poor, good and excellent credit. In those cases, the people with excellent credit paid $1,358 a year. The consumers with good credit paid $1,608 while those with poor credit paid $3,872. In contrast, a consumer with excellent credit and a DWI were charged $2,198 a year.

Consumer Reports also wrote that insurance company Progressive Northern was the harshest for Oklahomans with poor credit. The annual premium was an astounding $11,949, the publication reported. The most attractive company was listed as Shelter Mutual with an annual premium of $2,399.

The publication pointed out that insurance companies did not use credit scores until the mid-1990s when insurance executives started testing the theory that the scores might help predict claim losses.

Yet, most consumers were unaware as late as 2006 that their credit scores could affect what they pay for car insurance.

Oklahoma Insurance Commissioner John Doak referred to a 2014 Arkansas Insurance Department study that shows consumers were more than three times more likely to have their insurance premiums lowered, rather than raised, based on their credit information.

“If credit information plays a factor in a consumer's rate, it is much more likely to be a positive factor,” he said in a prepared statement.

However, Doak said state law requires an insurance company to disclose if a consumer’s credit information resulted in an adverse action, like a rate increase or a policy cancellation.

“This disclosure must specifically list which credit information was the cause of the adverse action,” he said. “Additionally, the consumer’s credit information cannot be the sole reason for the adverse action without consideration of other risk factors.”

Doak has had several conversations with Standridge about the issue, admitting he is “eager to work with him in the upcoming session to ensure that consumers are treated fairly.”

California, Hawaii and Massachusetts are the only states that prohibit insurers from using credit scores to set prices. In the other 47 states, consumers are paying for accidents they’ve never had because of the credit score criteria.

The complete Consumer Reports article can be found at www.consumerreports.org.

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Tim Farley

Tim Farley is an award-winning journalist with more than 30 years of experience, including...

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