State Regulators: Credit Scoring Use Needs More Study

State regulators recently told Congress that more study of the use of credit scoring by insurance companies is needed to determine if the practice is unfairly discriminatory.

“As state regulators, it is our sincere desire that the federal government assist, not detract, from the states’ regulatory efforts to address this important issue,” Florida Insurance Commissioner Kevin McCarty said. “A more in-depth and objective study by the FTC [Federal Trade Commission] on the relationship between credit scores and race/ethnicity is needed to determine if there is, in fact, a ‘proxy effect’ that shows a demonstrable correlation between credit scores and race/ethnicity.”

McCarty was testifying on behalf of the National Association of Insurance Commissioners (NAIC) before the U.S. House Financial Services Committee’s Subcommittee on Oversight and Investigations at a hearing titled, “The Impact of Credit-Based Insurance Scoring on the Availability and Affordability of Insurance.”

The subcommittee is weighing legislation to further study and potentially ban the use of credit scoring in insurance.

“Proponents argue that credit-based insurance scores are predictive of an insured’s future claims experience, and are necessary tools for underwriting and/or rating. Critics argue that the use of credit-based scores are merely another example of imposed discrimination against lower income individuals and protected classes of people,” said McCarty, who chairs the NAIC’s Property and Casualty Insurance Committee.

“That is the heart of the debate: Studies do show that credit scores can be predictors of future claim activity, but the same studies also show that the use of these scores disparately impacts certain classes of people, and thus has a discriminatory effect,” McCarty continued.

McCarty acknowledged that the world is in a new information age in which “a dizzying myriad of information may be obtained about an individual” through health records, sex offender databases, insurance claims histories, consumer buying habits, Internet usage, DNA/gene-testing and credit scoring. Yet the availability of all of these information tools does necessarily justify their use to rate or underwrite insurance, he told Congress.

“It is important to understand that although many of these tools may show mathematical correlations with insurance claims, this does not necessarily make them fair and valid criteria for insurance purposes,” he said.

He cited the use of race and genetics as two examples of criteria that while they might produce actuarial useful information, their use is prohibited for public policy reasons.

He took issue with previous credit scoring studies because, he said, they focus on the frequency of claims filed by people with low credit scores, rather than the losses. “The studies show only that consumers with lower credit scores file more claims, not that they have greater loss events,” he suggested. McCarty, whose own state restricts the use of credit scoring. He told federal officials that 48 states have taken some form of legislative or regulatory action limiting the use of credit scoring.