words Al Woods
Car insurance is all about risk. When you take out an insurance policy, you’re basically paying for the insurance company to assume the risk of an accident or mishap. Insurance companies set their premiums according to a variety of risk factors, such as driving record, where you live, the type and age of the car you drive, and so on.
But some of these factors aren’t related to driving behavior or environmental risks such as natural disasters. Gender and credit scores have long been used as factors when determining insurance rates — but some states are now banning the practice.
Photo by Evgeny Tchebotarev on Unsplash
Why Insurance Companies Use Gender and Credit Scores
So why has gender and credit score been a criteria for insurance rates up until now?
When it comes to gender, one of the reasons comes down to statistics — the cornerstone of assessing the risk of a claim. Statistically, women drive less, are less likely to get in car accidents, be involved in a DUI, or get issued tickets than men. Men are statistically proven to engage in riskier and more aggressive behavior while on the road — especially when they are younger or in their teenage years. Accordingly, women tend to pay less for their car insurance than men. This policy has received criticism on the ground of sex discrimination — not only is gender equality becoming a larger and more mainstream issue, but the push toward recognition of non-binary gender means state identification documents may soon include a third option for gender. This will force a change in how insurance companies assess gender-related risk.
Credit scores are used by insurance companies because credit scores are used to assess the likelihood a person will make good on a loan, credit card payments, or other financial obligations. If your credit score is low, you may be seen by lenders and insurers as being unreliable when it comes to paying bills. One of the reasons the use of credit scores by insurance companies has been criticized is because some feel it discriminates unfairly against the economically disadvantaged. This is particularly true of minorities — people of color have less access to generational wealth and proportionately lower credit scores, which pushes them toward subprime lenders that charge much more interest.
What States Have Banned the Use of Gender and Credit Scores
Here are the states where the use of gender in determining insurance rates is banned:
- California
- Hawaii
- Massachusetts
- Michigan
- Montana (which first banned the use of gender information in 1985, but recently reversed the ban in 2021)
- North Carolina
- Pennsylvania.
Here are the states where the use of credit score information is banned:
- California
- Hawaii
- Maryland
- Massachusetts
- Michigan
- Oregon
- Utah
- Washington
The Ban’s Effect on Insurance Rates
So does banning gender and credit rating info make a difference in insurance rates?
That depends on who you ask. Overall, men pay more for car insurance than women with or without a ban on the use of gender information. For example, Kristine Lee at The Zebra points out that while the overall disparity in premiums between genders is fairly small for adult drivers, the difference between teenage male and female drivers is much more significant: male teen drivers pay $600 more per year than female teens.
Other studies have shown that in states where the use of gender information is banned, men pay about 6% more than women in car insurance premiums. In states where it isn’t banned, that difference is closer to 10%. Either way, women pay less for car insurance, but there’s a definite change in degree.
Looking Toward the Future
Will more states prohibit factors like gender and credit scores going into the future? It seems likely. Insurance companies are starting to shift more toward focusing on risk factors that are under the driver’s control, which excludes factors such as gender. Also, the discriminatory undertones of using credit scores as a risk indicator for insurance may decrease in popularity and be increasingly de-emphasized by insurance companies.
Of course, some criteria are unlikely to change anytime soon despite not having anything to do with driving behavior. For example, living in an area prone to natural disasters such as floods or tornadoes will always pose an increased risk of an expensive insurance claim. Living in a dense urban area means more chances of vandalism or car theft, not to mention the increased traffic and number of pedestrians and cyclists on the road means a greater probability of an accident.
What will most likely happen as gender and credit info become less relevant to insurance premiums is that insurers will make up for it with more accurate assessment of other risk factors. For example, using technology like telematics trackers and AI / machine learning will allow insurers to more accurately measure risk based on driving behavior.
