The Missouri Department of Insurance (MDI) announced that Gov. Bob Holden is calling for greater consumer protection against using credit histories to deny insurance coverage or raise rates.
In a package delivered to the state General Assembly, Holden called the practice of credit scoring “unfair” and claimed that its use will leave “thousands of Missourians without insurance coverage, financially vulnerable, and with very costly coverage as their only option.”
Department of Insurance Director Scott Lakin, a Holden appointee, said the governor’s call for state action on credit scoring reflects a national and bipartisan movement to better protect consumers against such abuses — especially those who are forced to pay higher insurance rates because they have little or no credit history.
Holden highlighted seniors, farmers and minorities as examples of groups adversely affected by credit scoring. Nine of every 10 insurers now are using to help underwrite or price auto and homeowners insurance policies.
MDI Director Lakin said Holden’s legislative package would not ban the increasingly controversial practice of credit scoring, but would set minimum standards for its use.
Holden’s 2003 package also includes two other proposals closely tied to MDI’s work: state protection of individual medical privacy; and adopting national standards to protect seniors against rapidly escalating long-term care insurance rates that force many to drop coverage.
Rep. Phil Smith, D-Louisiana, will handle the governor’s credit-scoring initiative in the House. MDI has discovered this issue crosses party lines. Numerous Republican legislators, especially from southwest Missouri, are expressing concerns about constituent complaints on the credit scoring. Sen. Morris Westfall, R-Halfway, has introduced SB 981, which would prohibit insurers from penalizing policyholders whose financial histories cannot produce a credit score.
The Missouri Association of Insurance Agents also has identified the regulation of credit scoring as its top legislative priority for 2002.
Insurance credit scoring differs from the original models developed by the lending industry to help avoid making loans to persons likely to default. A prospective homeowner, for example, can qualify for a mortgage loan, but face rejection for the insurance to cover the property, Lakin said.
Defenders of credit scoring characterize it as an objective, administratively inexpensive means of choosing whom to insure and making sure their rates cover the true cost of risk. They cite studies purporting to show a high correlation between poor credit histories and high rates of insurance claims.
MDI has found that more than a dozen states already have adopted some limits on the use of credit scoring, and 25 to 30 states this year are expected to debate further restrictions – if not outright bans. Among the criticisms of the practice:
An estimated one of every eight American adults has insufficient financial history to produce a credit score that insurers use to rate risks. Regulators across the country are especially worried about potential discrimination against groups that tend to avoid lifestyles dependent on installment debt and credit cards, such as the elderly, Hispanics, Muslims and farmers who rely on nontraditional lending sources.
No studies identify why a link exists between credit scores and insurance claims – and whether that link masks illegal or unfair forms of discrimination.
Although a few large insurers have developed their own credit-scoring models, most buy the information from non-licensed companies that guard their formulas as trade secrets. Lakin noted that state regulators cannot examine these firms to determine whether the models contain illegal or improper elements, and consumers cannot determine how to improve their scores.
Consumers often do not accept the basic logic linking their credit histories and likelihood of filing a claim.
While the federal Fair Credit Reporting Act sets safeguards for consumers in dealing with credit bureaus about their financial histories, such protections largely have not been extended to the credit scores extracted from that data, and states – the traditional regulators of insurers – do not have the power to enforce the federal law’s provisions.