Testimony from:
Robert Melvin, Senior Manager, State Government Affairs for the Northeast Region, R Street Institute

R Street Testimony in Opposition to RI HB 5830 “An Act Relating to Motor and Other Vehicles—Insurance Rates.”

March 6, 2023

Rhode Island House Committee on Corporations

Chairman Solomon and members of the committee:

My name is Robert Melvin, and I am the senior manager of state government affairs for the Northeast region with the R Street Institute. The R Street Institute is a nonprofit, nonpartisan public policy research organization. Our mission is to engage in policy research and outreach to promote free markets and limited, effective government in many areas, including insurance regulation, which we have researched since our founding in 2012. Our efforts to promote competitive insurance markets are why we are opposed to HB 5830.

HB 5830 would preclude automobile insurance companies from utilizing an applicant’s credit in relation to assessing risk. We have a long-standing position that the best regulator of insurance rates is the market itself.

The R Street Institute releases an annual insurance report card of the various state insurance markets—from 2020 to 2022 the Ocean State raised its grade from a C to a C+.[1] Unfortunately, prescribing limits on the ability of auto-insurers to use credit history or scores will only make the Rhode Island marketplace less competitive and undermine the progress made by the state.

Credit based insurance scores should not be conflated with credit scores. Credit-based scoring weighs a multitude of components with respect to applicants, such as the length of one’s credit history, unsettled debt, bankruptcies and collections, new credit requests, and other factors in addition to the payment history, which is used to determine a credit score.[2] The amalgamation of these factors is used to develop a comprehensive insurance score. Insurance scores are utilized for predicting insurance losses, as opposed to credit scores, which are used to assess potential delinquency.[3]

Many studies have determined that there is a solid association between insurance scores and losses, which is why there is widespread acceptance of insurance scores. One report commissioned by the Texas Department of Insurance determined that “there appears to be a strong relationship between credit score and insurance risk (or loss) […] as credit scores improve, the pure premium or average loss per vehicle decreases. Conversely, as the credit scores worsen, the average loss per vehicle increases.”[4] Moreover, this same study concluded that the use of credit-based insurance scores drastically improved accuracy for pricing in determining risk when combined with other rating factors like age of the driver, as well as geographic area. The Federal Trade Commission (FTC) reached this same determination in a study they presented to Congress.[5]

Credit scoring is by far the fairest and broadest measurement for insurers outside of telematics, which detail individual driving behavior, which is available in some cases.[6] The National Association of Insurance Commissioners (NAIC), states that credit-based insurance scores cannot use personal information—such as race, religion, gender, marital status, income, employment history, interest rates being charged, etc.—to calculate a score.[7] In addition, credit-based insurance scores are never the only part of determining premiums, but one of a variety of factors considered.[8] The Texas Department of Insurance report also concluded that the consideration of credit scores did not cause racial or income discrimination.[9] Credit ratings have no relation to wealth or income, rather they are measurements of an individual’s ability to effectively manage their finances. Unlike demographics, credit scores can be improved by individuals through reducing debts and maintaining low balances on loans.[10]

Restricting the use of credit-based insurance scores will have unintended consequences, such as increased premiums across the board. Prohibiting insurance companies from using credit information for rating risk will force lower-risk drivers to prop up the premiums of riskier drivers.[11] The most reasonable approach to ensure credit information can continue to be considered without it being the dominant factor for rating insurance risk is the model law created by the National Council of Insurance Legislators (NCOIL), which provides sensible guidelines related to the consideration of credit scores—an alternative that this committee should consider in lieu of the current proposal.[12]

The R Street Institute urges you to assess these facts as you review HB 5830. Rhode Island has made movements towards improving its insurance market, but placing restrictions on the use of credit scores for auto-insurers for determining premiums will only set Rhode Island back. Credit scores are not the only factor used to determine risk, but are one of a variety of variables. Moreover, the use of credit to determine risk does not result in racial or income discrimination. For these reasons, we strongly urge you to oppose HB 5830 as drafted.         

Thank you,

Robert Melvin
Senior Manager, Government Affairs for the Northeast Region
R Street Institute
[email protected]

[1] Jerry Theodorou, “2022 Insurance Regulation Report Card,” R Street Institute Policy Study No. 272 (December 2022). https://www.rstreet.org/wp-content/uploads/2023/01/r-street-policy-study-no-272-REVD.pdf.

[2] Jerry Theodorou, “Credit-Based Insurance Scores – The Battle Heats Up,” Insurance Journal, May 20, 2021. https://www.insurancejournal.com/blogs/2021/05/20/615231.htm.

[3] “Background on: Credit scoring,” Insurance Information Institute, April 8, 2019. https://www.iii.org/article/background-on-credit-scoring.

[4] Texas Department of Insurance, “Report to the 79th Legislature: Use of Credit Information by Insurers in Texas.” Dec. 30, 2004. https://www.tdi.texas.gov/reports/documents/creditrpt04.pdf

[5] U.S. Federal Trade Commission, “Credit-Based Insurance Scores: Impacts on Consumers of Automobile Insurance,” July 2007. https://www.ftc.gov/sites/default/files/documents/reports/credit-based-insurance-scores-impacts-consumers-automobile-insurance-report-congress-federal-trade/p044804facta_report_credit-based_insurance_scores.pdf.

[6] “Telematics/ Usage-Based Insurance,” National Association of Insurance Commissioners, Feb. 1, 2023. https://content.naic.org/cipr-topics/telematicsusage-based-insurance#:~:text=The%20use%20of%20telematics%20helps,refine%20or%20differentiate%20UBI%20products.

[7] “Credit-Based Insurance Scores Aren’t the Same as a Credit Score. Understand How Credit and Other Factors Determine Your Premiums,” National Association of Insurance Commissioners, July 22, 2020. https://naic.soutronglobal.net/Portal/Public/en-GB/RecordView/Index/25389.

[8] Ibid.

[9] Texas Department of Insurance. https://www.tdi.texas.gov/reports/documents/creditrpt04.pdf.

[10] MyFICO, “How to repair your credit and improve your FICO score,” last accessed March 7, 2023. https://www.myfico.com/credit-education/improve-your-credit-score.

[11] Motley Fool Transcribers, “The Travelers Companies Inc (TRV) Q3 2021 Earnings Call Transcript,” The Motley Fool, Oct. 19, 2021. https://www.fool.com/earnings/call-transcripts/2021/10/19/the-travelers-companies-inc-trv-q3-2021-earnings-c.

[12] “Model Act Regarding Use of Credit Information in Personal Insurance,” National Council of Insurance Legislators, Sept. 26, 2020.  http://ncoil.org/wp-content/uploads/2020/10/Credit-Model-readopted-9-26-20.pdf.