Root Car Insurance Will Stop Using Credit Scores to Set Rates (2024)

• One way to tackle systemic racism, the car-insurance company Root says, is if your insurance company doesn't look at your credit score but at how you actually drive.
• A national insurance organization is looking into that. The problem? It will probably take until 2025 to fully implement a change.
• Three states—California, Hawaii, and Massachusetts—do not allow credit ratings to be used to determine car insurance rates, so there is precedent.

The color of your skin can affect how much you pay for your car insurance, Root Insurance says, and it wants to change that. Using financial security as a means of deciding rates is one factor in the disproportionately high insurance rates for members of racial minorities, the company says. The trouble is, Root will need until 2025 to untangle credit scores from rate-setting. When it does, it says it will be "one step closer to reinventing a broken industry system that assigns rates based primarily on demographic factors."

Now the National Association of Insurance Commissioners (NAIC) is looking into it as well. In late July, NAIC announced the formation of a special committee focused on race and insurance. One of the four missions the new committee was tasked with was determining "whether current practices exist in the insurance sector that potentially disadvantage minorities." The NAIC's announcement did not mention credit scores specifically, but that isn't stopping Root.

$1500 More a Year?

Root believes that some Americans are discriminated against by car insurance companies to the tune of $1500 or more in additional premium payments a year. The extra cost comes from poor credit scores, which can be influenced by systemic racism, despite the fact that many of those being charged higher rates might be "the safest drivers on the road," Root says.

That's why the company said this week that it would become the first auto insurer to take credit scores out of its insurance cost equation nationwide. Currently, California, Hawaii, and Massachusetts do not use credit scores in their car insurance underwriting process, and Root says it already relies on credit scores less than other insurers across the country because it knows that credit scores have an inherent bias baked in. "By basing rates on demographic factors like credit score, the traditional car insurance industry has long relied on unfair, discriminatory biases in its insurance pricing," Root says. Root's plan for change will require the company to not only rethink ways to calculate the right rates, but also to work with regulators so they understand the new system.

App-Based Insuring

Let's start with Root's new model. A Root spokesperson told Car and Driver that the company will rely more on telematics and other factors as it comes up with its replacement methodology. It's an app-based company, and drivers take a short test drive monitored by smartphone as part of the rate-quoting process.

The trick is going to be getting the new model to be as accurate as the current model so that Root is not at a market disadvantage.

"The reality is credit grouping is still correlated—not causal, nor accurate at the individual level—with insurance costs," the spokesperson said. "Any information that's predictive of insurance costs will be used by the market due to the economic forces at play; anyone who doesn't use that data might be at a large disadvantage unless they can test and find more predictive information to use in place. Telematics will serve as that information, but we have to demonstrate the predictive and fair nature of that data."

Why Will It Take So Long?

Which brings us to the regulatory aspect of this change. Root says it will take at least five years to fully remove credit scores from its pricing method and says that one of the reasons is that regulators need to understand and accept the use of telematics. But each state has its own insurance regulation individually, and Root admits the task won't be easy. "Credit scores have long been viewed by the industry and regulators as one of the most predictive indicators of risk," the spokesperson said. "There is a lot of work to be done to implement the changes, get approval for those rates, and phase in any impact to our policyholders. But we know that it is the right thing to do."

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." Root is calling on other insurers to join its fair car insurance stance and says it has already begun reaching out to gain support from state regulators and other governing bodies like the NAIC to sign on to make car insurance more fair for everyone.

Root has also promised to release updates on its mission at least once a year. We'll keep an eye out.