Battle Lines Form Around the Question of Credit Scores and Discrimination

A legal battle is happening around the use of credit scores in US auto insurance. Insurers have successfully challenged a regulatory ban, but have since failed to stop an investigation by law officers, centred around potential race discrimination. Is it a harbinger of things to come?

This is a case about how seriously two US auto insurers want to retain their use of credit scores. By taking their challenge to court, they have in effect put into the public arena the question of how they weigh up social and ethical concerns against actuarial practices.

This is also a case about how seriously regulators and law officers are prepared to challenge the use of credit scores. They've moved from basing it around insurance law, to using general law on discrimination.

What this case is not about is whether credit scores result in discriminatory outcomes. Note this comment by a State Supreme Court judge in an August 2022 ruling on this case…

“It is well established that there is an undeniable link between race and poverty, and any policy that discriminates based on credit worthiness correspondingly results in a disparate impact on communities of color.”

So for any insurer using credit scores in underwriting, claims or counter fraud, this case is worth tracking, for it will shine a light on what to me is the central issue: how actuarial practices are weighed up relative to social and ethical concerns. Does the evidence of actuarial analysis count for more, relative to the evidence of discriminatory outcomes?

You can think of this in more fundamental terms. Does the insurer’s data and analysis take precedence over the consumer group’s data and analysis? If both are judged to be sound, then the way forward will be determined by power. In which case, the question of who eventually comes out top between insurers and policymakers / legislators doesn’t feel like a difficult one to call.

Some Background

This legal battle is happening in the US state of Washington. Hardly a big insurance market, many of you will be thinking, but many other states will be keeping a close watch on developments. One of the insurers involved, Progressive, is one of the really big US auto insurers, with a strong position on usage based insurance (aka telematics). And a number of national insurance associations have also been involved alongside Progressive and PEMCO.

So this is a test case, the outcome of which will have consequences in much bigger US markets such as California and New York, and in the markets of other countries too.

A quick summer of what has been happening. The state insurance commissioner for Washington issued a ban on the use of credit scores in auto and home insurance. Progressive and PEMCO, the two insurers, successfully challenged the ban, on the basis that the state insurance commissioner had exceeded his authority. He couldn’t issue a rule to temporarily ban credit scoring when there was a specific state statute that allowed insurers to use credit scoring.

As a result of the ban being overturned, the Attorney General for Washington state launched an investigation into whether the two insurers use of credit scores violated state equality and consumer protection laws. In other words, the focus was moved from insurance laws to wider laws.

The two insurers took legal steps to stop that investigation, but the state Supreme Court recently rejected that. The Attorney General’s investigation will now proceed, no doubt with a great deal more media attention.

Reasons Why

What stood out for me in this case was the Supreme Court judge’s acknowledgement that the use of credit scores has discriminatory consequences. The weight of the evidence for this was accepted. Insurers would therefore find it difficult to challenge that evidence. What they seem to be doing instead is saying that their actuarial practices should carry more weight.

Were the two insurers right to push back against the investigation by the Attorney General’s office? I think not. Here’s why. Clearly, the state insurance commissioner and the Attorney General for Washington could have turned to policymakers for a new piece of legislation that would address the state’s Supreme Court concerns. In my opinion, they didn’t follow that path because there was a higher impact one was available.

That higher impact path was to seek out evidence for how exactly those actuarial practices were being implemented within these two insurers. They wanted to get inside those underwriting engines and see how well those practices were being managed and controlled.

An analogue might help here. When you buy a car, you can judge its condition and value by looking it over from the outside and doing a bit of a rummage around inside where people sit, perhaps under the bonnet as well. Or, you can lift the bonnet and start running a series of checks to weigh up just how well the engine, gear box, brakes and clutch are actually performing. The Attorney General (AG) is doing the investigative equivalent of the latter.

Raised Profile

By challenging the AG’s investigation, the two insurers have raised the profile of the investigation amongst state legislators. I think it was a gamble with an upside much smaller than its downside, for reasons I’ll now explain.

Let’s begin by considering why the state Attorney General (AG) is going to such lengths. I think for two reasons. Firstly, because the AG sees the evidence for discriminatory outcomes as strong enough to warrant it. And secondly, because the AG wants to convince state legislators that any change to the law has to be strong enough to properly address the full nature of the problem. The two insurers may well have made that latter point much easier for the Attorney General to achieve.

That said, I believe such an investigation, be it in the US or elsewhere, was inevitable at some point in time. It is interesting that it may well emerge for the first time in Olympia, the state capitol of Washington state. Then again, why not!

Actuarial Practices

From what I established around this case, the two insurers view their actuarial practices as the foundation of their case for continuing to use credit scores. So what exactly are these actuarial practices, and are they really so sacrosanct?

I’m not an actuary but I believe that key principles at play here are selection and anti-selection, moral hazard, the fairness of merit and the broader theme of personalisation. The narrative for these is strong and often long established. Newer themes like personalisation are a ‘given’ across the market at the moment. In broad terms then, they create a strong ‘this is how we work’ culture, which the sector, not unnaturally, wants to defend.

Principles Change

What I would advise however is that key principles like these are not fixed. They have evolved in the past and will continued to evolve in the future, for reasons originating both within and outwith of the market. I’ll highlight this with a quote from an article of mine that will soon be published here in the UK by the Institute and Faculty of Actuaries (IoFA). The words are those of the renown British actuary Charles Ansell, talking to a Parliamentary committee in 1844:

“My own opinion, for a long series of years, has been that female life, as it exists on the books of insurance offices, was very much worse indeed than male lives, amounting almost to a motive for refusing the insurance of them at all; and I believe the experience of others has been the same.”

What this tells us is that the fairness of merit is not something that is fixed and resolute, but a moral and political interpretation, shaped by what you choose to see in what you choose to look at. It is one that evolves over time, influenced by wider societal views, and it will continue to do so. We need to be open then to the rethinking of principles and interpretations, especially when the sector is undergoing significant change, as it did in Victorian times, and as it is doing now in these digital times.

Changing Principles

Changing the cultural mindset around how you see the sector working is hard. It feels a bit like redesigning the plane while it's in mid-flight. It requires an eye for detail, an open mind and a willingness to bring together both the immediate and the long term. As I said, this is hard, but equally, it could also be vital.

I think both the insurance and actuarial professions are at a ‘do we change’ crossroads. One of the things weighing against following the ‘review and change’ path is ‘how do we organise that change so that the sector’s future is secure?’ That is what I explore in my forthcoming paper for IoFA. What I would equally say in these circumstances is ‘beware of what could happen if you don’t change’. I wonder if we’re seeing the beginnings of that in Washington state?