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Consumers Dispute FTC Report on Insurance Credit Scoring

FTC Report Should be Rejected by Congress, Groups Argue

July 25, 2007

The groups called for Congress to reject the study and ban the use of credit scoring in insurance.

Insurance credit scoring is the use by insurers of consumers’ credit reports for determining insurance eligibility and premiums. Unknown to most consumers, insurers’ use of consumer credit information has spread to almost all insurers and is one of the most important factors in determining how much a consumer pays for auto or homeowners insurance.

Previous studies by the Missouri and Texas Departments of Insurance have found that insurance scoring discriminates against low income and minority consumers because of the racial and economic disparities inherent in scoring.

The Missouri study concluded that a consumer’s race was the single most predictive factor determining a consumer’s insurance score and, consequently, the consumer’s insurance premium.

Before the introduction of the credit scoring systems the insurance industry had used other unsupported standards and stereotypes with a racial proxy effect. After the major companies were sued for fair housing violations and were forced to eliminate these practices, the industry introduced a new practice -- credit-based insurance scoring -- that consumer and civil rights groups see as re-introducing racial and ethnic effects into the pricing of insurance.

The relationship between insurance credit scores and race is so strong, the groups charged, that even though the FTC used data handpicked by the industry, it found that credit scoring discriminates against low income and minority consumers, and that insurance scoring was a proxy for race.

Representatives of the Consumer Federation of America, the National Fair Housing Alliance, the National Consumer Law Center, and the Center for Economic Justice said the FTC study is fatally flawed because the insurance industry controlled the data used in the analysis.

Instead of requiring the submission of comprehensive policy data by a large number of insurers, the FTC used data handpicked by the insurance industry, the groups charge.

“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.

“By relying on handpicked data, the insurance industry was unnecessarily given opportunity to control the outcome of the study.”

Scant Evidence

The FTC study also confirms that, despite growing reliance on credit-based insurance scores, scant evidence exists to prove there is a meaningful connection between a consumer’s score and auto insurance losses. Without the need to demonstrate such a connection, insurers could use any consumer characteristic, such as hair color, to price insurance products, according to the groups.

“Despite finding no explanation for the alleged connection between insurance scores and losses, the FTC report somehow concludes credit scoring is valid and good for consumers. This is not an impartial analysis, but simply advocacy for insurers," said Birny Birnbaum of the Center for Economic Justice.

The groups also dismissed the report for failing to respond to the Congressional mandate to examine the impacts of insurance credit scoring on the availability and affordability of auto and homeowners insurance, and for “parroting insurance industry propaganda about insurance credit scoring.”

Section 215 of the Fair and Accurate Credit Transactions Act of 2003 required the Federal Reserve Board and the FTC to study the impact of credit scoring on the availability and affordability of credit and insurance and to determine whether credit scoring was truly related to insurance losses or simply a proxy for race, income or other factors.

“Incredibly, the FTC report downplays its own findings about the racial impact of insurance scoring -- the primary question asked by Congress -- and emphasizes the allegedly ‘predictive’ nature of credit scoring,” said Chi Chi Wu, staff attorney at the National Consumer Law Center.

“It’s outrageous that the FTC says that ‘credit scoring is good for consumers’ when it has a disparate impact on minorities. The FTC appears to believe minorities aren’t ‘consumers’ worth protecting,” Wu said.

"Other Factors"

Buried in the report, the groups said, is the fact that the alleged correlation between risk and credit-based insurance scores might be explained by other factors.

Instead of pursuing these other factors, the FTC employed subjective and pejorative racial stereotypes to try to support the alleged link between credit-based insurance scores and legitimate risk.

“To add insult to injury, the FTC report mimics the insurance industry blaming-the-victim psychobabble of claiming credit history is related to responsibility and risk management. A look at the actual scoring models shows that socio-economic factors have more impact on the score than loan payment history and that an insurance credit score has little to do with personal responsibility and everything to do with economic and racial status,” said Shanna L. Smith, president and CEO of the National Fair Housing Alliance.

The groups called on Congress to reject the study and to tell the FTC to conduct an objective, independent study. In addition, based on the available evidence of racial discrimination, Congress should ban the use of insurance credit scoring, said the groups.

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