Removing biases from the auto insurance industry

Root Insurance CEO Alex Timm joins Yahoo Finance’s On The Move panel to discuss how this car insurance company is working toward eliminating bias from credit scoring by 2025.

Video Transcript

JULIE HYMAN: Your credit score is the foundation for a lot of different things you have access to, different types of insurance, mortgages, credit cards, et cetera. Our next guest is aiming to eliminate the credit score as a factor in auto insurance, specifically.

He's Alex Timm. He's the Root Insurance Co-Founder and CEO. He's joining us from Columbus, Ohio. And you're phasing out the use of the credit score as a factor in determining who gets insurance, what the rates are, et cetera. What was behind this-- this decision?

ALEX TIMM: Yeah, when you look at credit score and you look at the auto insurance industry, in general, it's an incredibly discriminatory industry, really, and most consumers don't even realize it. So if you look at credit score, for instance, it's in the top five variables that actually predict-- or that insurance companies are using to assign a price to consumers. And what we see is we see that that effectively just charges basically the folks who can't afford insurance the most.

And the better you are and the better off you are, it basically gives you cheaper insurance. And this is a product that people have to buy. They're forced to buy. And so when we look at it, we think it's incredibly unfair.

JULIE HYMAN: I think Dan Howley wanted to hop in there. There you are, Dan.

DAN HOWLEY: Sorry about that. Yeah, Alex, I want to ask why credit scores are even used in auto insurance figuring out your rate at all?

ALEX TIMM: Yeah, effectively, you know, really why they're used is just because they're correlated with auto accidents. And so these insurance companies that are out there, they don't have really good data on how you drive, what your actual behaviors are. And so they're always using these weak proxies for whether or not you're going to get into an accident, I mean, things like your age, your gender, your credit score, these things that are-- I mean, a lot of them are protected classes, quite frankly, and wouldn't be allowed in other industries. But we still allow it to go on in insurance, and it's not right.

RICK NEWMAN: Hey, Alex, Rick Newman here. So tell us how you do evaluate risk? You use people's phones to track how they drive, I believe. So tell us how that works. And how do you-- how do you set pricing at the beginning, before you've had a period of time to evaluate the way people drive?

ALEX TIMM: Yeah, so actually, most of our customers, they download our app, and then we use all of the sensor devices on the phone. They drive around with us for a period of two to four weeks. And then if you're a good driver, we think you deserve a good rate. And so what we do is we then will use all of that driving data that you provide us to assign good drivers the best rates.

If you're not a good driver, you'll get a high rate. We think that's fair. It really gives power back to the consumer. In terms of, you know, how do you get insurance right away, we will insure people through that test drive period for a short period of time, if they need it right away. But very quickly we move off of that-- that price and on to a price based on how you're actually driving, which is what actually causes auto insurance accidents.

JULIE HYMAN: OK, so that, then, would eliminate the issue of people being on their best behavior in those two weeks as they're driving, right, because then you'll-- you'll adjust the rate?

ALEX TIMM: That's exactly right.

JULIE HYMAN: Gotcha. OK, so as you look at the credit score and all of this, I mean, what does your formula look like in terms of what you're putting in now and what it's going to look like after 2025?

ALEX TIMM: Yeah, so right now we-- because we're a very regulated industry, and so we do use all of the traditional rating variables, as well as this driving data. And so driving data still is hands-down the most important variable at Root. We do use credit still today. We still use gender. We still use age.

And what we really want to do is we're consistently working to eliminate those variables that we think are the most discriminatory. So we've already eliminated occupation and education, which most use. And obviously, you can imagine the societal impact that that has using those variables. And by 2025, we think we can get rid of credit score, as well as some of the other variables that we think-- that consumers really just don't have any control over, and it's not right.

JULIE HYMAN: All right, thanks so much. Appreciate it, Alex. Alex Timm is the Co-Founder and CEO of Root Insurance Unit.

ALEX TIMM: Thank you.