Insurance companies use credit scores to evaluate risk…
Automobile and home owner insurance companies have made it a standard practice to use credit-based insurance scores as a factor when setting insurance premiums. They may even use them to determine whether or not to insure you at all! Representing more than 400 consumer data companies, the Consumer Data Industry Association (CDIA) reports that 92% of the major auto insurance companies are using credit-based data to some extent to evaluate potential customers. Consumer groups have urged state and federal governments to recognize the flaws in the practice because it unfairly hurts African and Hispanic Americans who tend to have lower credit scores– resulting in higher insurance premiums for minorities. They also stress that credit reports are not always accurate and errors may result in higher premiums for a wide range of people – and by no fault of the individual consumer.
Insurers maintain that using statistical analysis of a consumer’s credit report they can predict the odds of a person filing a claim. Tillinghast Towers-Perrin and Casualty Actuarial Society have found that the loss ratio and associated expenses to premiums is significantly higher for those with lower credit scores. In fact, losses exceed premiums collected for those with the lowest credit scores. The Texas Department of Insurance took a study recently that showed the loss ratio for homeowners with the lowest scores was triple that of those with the highest scores. Drivers also showed similiar results with the highest scores having 40% fewer accidents over those with the lowest scores. Insurers believe that credit reports are a better predictor on future claims than by using motor vehicle records.
Recently, the Federal Trade Commission (FTC) released a study that largely sides with the industry concluding that credit scores predict the number of claims consumers file and to the total cost of those claims. Pamela Jones Harbour, one of the five FTC commissioners, took issue with the agency’s findings. “I distrust the integrity of the underlying data which the study was based,” Harbour wrote. Commissioner Jon Leibowitz, who voted to release the report, said that although the analysis appears to find insurance scoring does predict the risk of insurance claims, “the differences in credit-based insurance scores across racial and ethnic groups are a disturbing reminder that our society is — still — not race blind, and that vestiges of our history of discrimination remain ever-present.” The insurance industry, however, was pleased with the FTC report. “We believe scores reduce subsidization of bad risks by good ones, meaning most consumers pay less for insurance,” said David Snyder, vice president and assistant general counsel for the American Insurance Association.
The Consumer Federation of America, the National Fair Housing Alliance, the National Consumer Law Center and the Center for Economic Justice released a joint statement criticizing the FTC’s study on the use of credit scores and current methodology. “The FTC’s approach to collecting data for the analysis is like the federal government trying to do a study on the health impacts of tobacco use with data selected by tobacco companies for the study,” said Allen Fishbein of the Consumer Federation of America.
Pressure from consumer groups has led to some form of legistlative action being taken by 48 states since 2006 – either banning or restricting the use of insurance credit scores. Many of the states have modeled their laws using “The Model Act Regarding Use of Credit Information in Personal Insurance” created by the National Conference of Insurance Legislators, an organization focusing on insurance legislation and regulation. It was written to prevent insurers from using credit scores as the sole basis for denying, canceling or refusing to renew a policy or to raise rates and varies from state to state. For example:
- Georgia, Illinois and Utah prohibit using credit histories as the sole basis for underwriting or rating decisions.
- Oregon prohibits the use of credit histories to cancel or not renew existing customers’ policies or increase their rates.
- Maryland bans the use of credit histories when underwriting or rating existing customers.
Should consumers pay more for insurance when they lose their job and can’t make their card card payments? “Insurance premiums should be based on the risk of an accident, not a consumer’s bill-paying record for other goods and services,” said Norma Garcia, senior staff attorney for Consumers Union.