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States Study Insurers Use of Credit Scores

June 23, 2004
Does your credit affect your driving? On the surface, it doesn't seem logical but the insurance industry has argued for years that consumers with poor credit tend to have more traffic accidents and file more claims for damage under their homeowners' policies.

Insurance Credit Scoring • Consumers Dispute FTC Report on Insurance Credit Scoring • Secret Scores Influence Auto Insurance Rates • Industry Defends Credit Scoring • States Study Insurers Use of Credit Scores • Credit Rating Can Affect Insurance Premium • Insurance Companies Scrutinizing Customers' Credit Reports --- • More about Insurance ...

In fact, more than 90 percent of insurers use credit histories to evaluate policyholders and applicants. That means your credit rating can determine whether your insurance premiums go up or whether you qualify for a discount, and can even make the difference between being accepted or turned down for coverage.

The practice has long been controversial and consumer advocates are teaming up with state regulators to get it under control. In Missouri, a recent study found that the use of credit scores hurt minority and low-income consumers disproportionately.

Missouri has now joined with eight other states to launch a larger analysis of the effects of credit scoring, something the insurance industry contends is improper.

If the eight-state study supports the Missouri findings, it could lay the groundwork for new state laws banning the use of insurance credit scores as discriminatory, dealing a huge blow to the multibillion-dollar insurance industry.

The insurance industry has attacked the study on two fronts -- challenging its findings and raising legal arguments about whether the states have the legal right to conduct the expanded study.

Two insurance trade groups say the states are wrongfully using their "regulatory examination powers" for research on public policy issues and possibly violating existing anti-discrimination laws.

The insurance industry contends that the states have the right to gather and review company data only "to verify compliance with existing law" not to consider new laws. It also argued that taking ethnic and income discrimination into account would violate "insurers' right to use rationally based, neutral risk selection techniques."

The states participating in the study were Oregon, Alabama, Washington, Nevada, Montana, Indiana, and Missouri. On June 18 the Alabama Insurance Department notified insurers that it was withdrawing from the study.

In the Missouri study, regulators analyzed data from 12 insurance companies, covering 1999 through 2001, and found that insurance credit scores were lower in ZIP codes where minorities and the poor lived.

Some states, such as California, already ban credit scoring. Michigan's governor has proposed a full ban on the practice. Also, the Federal Trade Commission has been mandated by Congress to analyze what effect, if any, credit scoring has on the availability and pricing of insurance.

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