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Insurers Defend Use of Credit Scores

By Martin H. Bosworth
ConsumerAffairs.com

May 24, 2005
Insurance companies are scrambling to justify their use of credit histories, claiming in testimony to the Federal Trade Commission that the practice saves consumers money.

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The Property & Casualty Insurers Association of America (PCI), a nationwide insurance lobby group, told the FTC that credit-based "insurance scores" are beneficial to most consumers.

"High-risk consumers pay more for their coverage and ... low-risk consumers - the majority of the nation's drivers and homeowners - pay less," said Diana Lee, a PCI assistant vice president. "That's a tangible consumer benefit that study after study has verified."

PCI's testimony relied heavily on a study conducted by the Texas Department of Insurance (TDI), that indicated credit scoring aided in "yielding other variables" that determined whether a customer was likely to generate claims.

PCI does not always rely on state insurance reports, however. In February 2004, PCI funded a critique of a report commissioned by the Missouri Department of Insurance (MDI) that criticized the use of credit scoring by the auto insurance industry, claiming it targeted minorities and residents of "high-risk" (i.e. crime-ridden) ZIP codes.

The Missouri report contended that "The relationship between minority concentration in a ZIP Code and credit scores remained after eliminating a broad array of socioeconomic variables, such as income, educational attainment, marital status and unemployment rates, as possible causes. Indeed, minority concentration proved to be the single most reliable predictor of credit scores."

PCI's critique of the MDI report stated that the study "inappropriately, and without analysis, [implied] that all minority populations will be affected to the same degree by credit-based insurance scores…The study ignores the fact that the variation of scores between individuals will dwarf any differences among average scores by race, income, or zip code."

"We expect that an analysis which accounted for the variation of scores among individuals would show virtually no relationship between insurance scores and race or income," the insurance industry claimed.

Of note is the fact that the PCI study polled its own member companies, not consumers or lawmakers.

ConsumerAffairs.com has received a number of complaints from readers who claim their insurance companies increased their rates based on "other variables," including something as simple as a change of address.

Deidre of Dallas was a customer with Progressive Auto Insurance until she moved to a different neighborhood. "I called Progressive to inform them of the move. They increased my insurance to almost double the cost. I asked them why and was informed that I lived in a high crime area."

Deidre canceled her insurance and found another provider, but Progressive continued to bill her even after the cancellation, and reported her to credit agencies for non-payment.

Kimi of Fort Worth, Texas purchased auto insurance from Allstate in order to get a discount on her homeowners' insurance plan. As she found out, "The formula they have for rating is a secret, but it would include credit information, and it appeared that I had made a lot of payments on accounts."

"Since I was buying a house, I had paid off and closed as many accounts as possible, but all that money going out counted against me for my insurance, even though my credit rating is excellent. Therefore, my rate was higher than I had ever paid for car insurance," Kimi said in a complaint to ConsumerAffairs.com.

Several states have undertaken studies and analyses to determine if credit scoring unfairly discriminates against classes of citizens.

The state of Maryland voted in 2002 to ban credit scoring as a factor for underwriting insurance. As a result, insurance providers raised the premiums on all customers' bills in that state. According to one insurance industry association lobbyist, the Maryland ban caused "The 'good' scores to become 'average', and the 'average' scores to become 'poor'."

The ban, in the insurers' view, had both positives and negatives.

"Someone going through bankruptcy or perhaps a divorce could have easily seen their auto and homeowners rates decrease after the Maryland credit score bans. There are winners and losers in any risk classification or underwriting system," an industry analyst said.

For more about insurance credit scoring, see:

• Foundation for Taxpayer and Consumer Rights: This California-based nonprofit organization has a constant eye on the issues surrounding insurance scoring.

• InsuranceScored.com: Created by a frustrated victim of insurance scoring, this site provides the lowdown on why insurance companies use credit scores, who benefits and loses from the process, and what's being done about it on the state and national levels.

• ConsumerAffairs.com's Insurance Section: News and information to help you make the right choice of insurer. Report abuses and complaints via the ConsumerAffairs.com complaint page.

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