By Da Lin and Daniel Schwarcz

Law360 (May 8, 2020, 6:31 PM EDT )

Da Lin

Daniel Schwarcz

One of the most visible signs of the coronavirus pandemic's impact on our lives is in our driving habits; across the country, both automobile traffic and car accidents have decreased dramatically.[1] Auto insurers are primary beneficiaries of these changes as their claims payouts are far below prepandemic estimates. Yet unlike most businesses that have profited from the pandemic, auto insurers have done nothing to earn these gains.

For this reason, state insurance regulators should require auto insurers to return their windfall to consumers by providing rebates that fully reflect decreases in claims payouts due to the pandemic. While most insurers have already promised their policyholders some premium relief,[2] these promises are highly variable.[3] To illustrate, some have promised to refund to all policyholders 35% of monthly premiums for more than two months, while others have only promised limited savings for policyholders who renew their coverage.

These varying responses to the pandemic are inconsistent with the prohibition in every state, except Illinois, of excessive, inadequate or unfairly discriminatory insurance rates. This rule requires insurance rates to reflect the expected costs of providing coverage. By contrast, insurers' promised refunds to date seem to predominantly reflect marketing considerations. Certainly, states (other than California)[4] have not required insurers to demonstrate otherwise.

Insurance regulators may be reluctant to act because state laws only require insurance rates to reflect insurers' expected cost of future claims, not their actual loss experience. But this reasoning is flawed as the steep decrease in accident claims was entirely predictable once lockdowns began in March.

Since then, premiums have not reflected insurers' expected costs. The fact that this change occurred in the middle of most consumers' policy periods is immaterial, as policyholders can cancel coverage at any time and receive a proportionate refund of their premiums. Consequently, auto insurance rates have been illegally excessive and unfairly discriminatory since at least mid-March.

In addition to requiring actuarially-based rebates to consumers, insurance regulators should also ensure that any post-pandemic premium increase is actuarially justified. Appreciating this concern requires understanding a number that most people have never heard of: the insurance score. Like traditional credit scores, insurance scores are calculated based on consumers' credit information. FICO's insurance scores, for example, are affected by payment history, current debt level and length of credit history, among other credit factors.[5]

Ordinarily, insurance scores predict insurance claims for reasons that don't simply piggyback off of objectionable considerations like race[6] or income.[7] For this reason, 47 states — all but California, Hawaii and Massachusetts — allow insurers to use insurance scores in determining insurability and rates.[8]

But deep economic shocks like the current coronavirus crisis disrupt the normal relationship between insurance scores and risk. It's easy to see how. Over 30 million Americans have filed for unemployment benefits since March.[9] Many of them will see their credit deteriorate as they turn to credit cards and loans to pay for expenses, miss debt payments and face other economic hardships.

Because the impact of the coronavirus is widespread, reaching both high-risk and low-risk drivers alike, the predictive relationship that ordinarily exists between insurance scores and insurance risks will become distorted. Put bluntly, if insurers use post-pandemic insurance scores for underwriting and pricing, drivers — especially those most vulnerable to the pandemic's economic effects — could pay more for auto insurance even though the expected cost of insuring them remains unchanged.

To prevent this distortion, regulators should bar insurers from counting credit events against drivers' insurance scores during the pandemic. In many states, consumers can already request an allowance from insurers if their credit was harmed by extraordinary life circumstances, which includes "catastrophic event[s] as declared by the federal or state government."

But the burden of requesting this allowance lies with the consumer. That shouldn't be the case during a global pandemic. The extraordinary life circumstances allowance should apply automatically to exclude adverse coronavirus-related credit events from insurance-scoring models.

Auto insurers are experiencing a massive windfall as a result of the coronavirus, but they are not returning a fair portion of those gains to consumers. And if they continue to do business as usual, they will disproportionately harm those who can afford it the least. State insurance regulators must use their authority to right these wrongs.

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Da Lin is an assistant professor at the University of Richmond School of Law. 

Daniel Schwarcz is the Fredrikson and Byron professor of law at the University of Minnesota Law School.

The opinions expressed herein are those of the author and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] https://roadecology.ucdavis.edu/files/content/projects/COVID_CHIPs_Impacts.pdf.

[2] https://www.nytimes.com/2020/04/06/business/coronavirus-car-insurance.html.

[3] https://consumerfed.org/press_release/report-card-to-date-on-the-6-5-billion-promised-to-auto-insurance-customers-as-people-drive-less-due-to-covid-19/.

[4] http://www.insurance.ca.gov/0400-news/0100-press-releases/2020/release038-2020.cfm.

[5] https://insurancescores.fico.com/InScore.

[6] 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.

[7] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2685304.

[8] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2135800.

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