Root Insurance pledged to eliminate the use of credit scoring from its car insurance pricing model by 2025, a move the InsurTech said will help remove bias and discrimination from the process.

“Eliminating credit scores is a major and necessary step toward dismantling archaic industry practices and making car insurance fairer,” Alex Timm, co-founder and CEO of Root, said in prepared remarks. “We are committed to working with our partners, regulators and industry stakeholders to adopt this important change, and hope our announcement today inspires others to join us in fighting discrimination, bias and systemic inequity in auto insurance. It’s time to drop the score.”

The ongoing COVID-19 pandemic and the economic fallout that followed, as well as the emerging social justice movement, encouraged Root to make its decision, according to Tom Kuhn, the company’s director of Communications.

“Relying on credit scores disproportionately harms historically underresourced communities, immigrants and those struggling to pay large medical expenses, reinforcing the problem of inherent bias facing our society,” Kuhn told Carrier Management. “Despite the seriousness and scale of the problem, we have a big job to do to make people aware.”

Root has billed itself since its 2015 launch as basing its auto insurance rates primarily on driving behavior (better driving=better rate) gauged via telematics. Other factors are also used, including driving record and credit score, with the driving score garnering about a 35 percent weight in the pricing model, according to a graphic on Root’s website.

Root’s announcement that it would eliminate credit scoring in auto insurance underwriting faults insurer use of the practice along with demographic factors such as occupation and education.

Is Credit Scoring Unpopular?

What’s more, Root asserted [based on a new survey it conducted] that many customers don’t even know that a credit score is used to determine auto insurance pricing. A majority of respondents said that they felt the practice was unfair, once made aware of the issue, and they wanted bias and discrimination removed from auto insurance pricing, Root said. The survey, conducted by Edelman Intelligence earlier this summer, involved just over 1,000 U.S. adults, Root said.

Kuhn acknowledged that Root has used credit score to determine its rates from the start but asserted the insurer relies “far less on credit scores than most in our industry.”

He also said that removing credit scoring from insurance underwriting is a difficult process – hence the five-year timeframe.

“This isn’t easy,” he said. “Credit scores have long been viewed by the industry and regulators as one of the most predictive indicators of risk. There is a lot of work to be done to implement the changes, get approval for those rates on a state-by-state basis and phase-in any impact to our policyholders.”

Kuhn said getting rid of credit scoring is the right decision, regardless of the challenges ahead in enacting the decision. He added technology can do a better job of gathering accurate driving data anyway.

“Driving behavior, measured through telematics, can and will be even more predictive and far more fair than credit score when it comes to insurance rates,” Kuhn said.

Will Others Follow?

Root, a rumored candidate for an initial public offering, made its pledge to eliminate credit scoring from auto insurance underwriting even as it remains a relatively small player. Root currently accounts for less than 0.2 percent of the auto insurance market, according to a recent market assessment written by Matteo Carbone of the Connected Insurance Observatory and Sri Nagarajan, co-founder of the FinTech Camino Ventures, and republished by Carrier Management.

Regardless, Root is hoping to encourage other insurers to make the same decision to leave behind credit scoring.

“We also want to encourage the industry to move with us,” Kuhn said. “This isn’t really only about Root—it’s about making car insurance more fair and equitable, and we know it takes time for an industry to move.”

Root, in its announcement, said it hoped the industry would follow and embrace the National Association of Insurance Commissioner’s recent call to address industrywide discrimination. NAIC formed a committee to address the issue through research, discourse and eventual recommendations for changes to increase diversity and inclusion in the industry.

Sources: Root, NAIC