Missouri DOI Finds Insurance Scoring Harms Poor, Minorities

By | February 23, 2004

Insurers’ use of credit scoring in underwriting and rating personal lines insurance harms poor and minority policyholders in Missouri, according to a study released by the state’s insurance department.

The report, Insurance-Based Credit Scores: Impact on Minority and Low Income Populations in Missouri (available online at insurance.mo.gov/reports/credscore.pdf), arrived at the following findings:

“1. On average, residents of areas with high minority concentrations tend to have significantly worse credit scores than individuals who reside elsewhere.

2. On average, residents of poor communities tend to have significantly worse credit scores than those who reside elsewhere.

3. Credit scores are significantly correlated with minority concentration in a ZIP Code, even after controlling for income, educational attainment, marital status, urban residence, the unemployment rate and other socioeconomic factors.

4. The minority status and income levels of individuals are correlated with credit scores, regardless of place of residence.”

Missouri Gov. Bob Holden, a Democrat, immediately seized upon the study’s findings to call for a ban on the use of insurance scoring in the state. The report was swiftly attacked by insurance industry lobbyists on methodological and ideological grounds.

“The Department of Insurance study ignored the most important factor considered by every insurance company when writing a policy—risk of loss,” said Diana Lee, a researcher for the Des Plaines, Ill.-based Property Casualty Insurers Association of America (PCI). “The study only examined insurance score data aggregated at a ZIP code level and did not take into account policyholders’ loss experience. Insurers do not collect information on race, ethnicity or income. They only compile data on risk factors and they apply these factors equally to every consumer.”

Industry lobbyists pointed to a study conducted by the University of Texas last year which found that insurance scoring is an actuarially valid underwriting tool.

Last year, Missouri’s legislature passed a bill based upon the National Conference of Insurance Legislators’ model act on credit that prohibits insurers from using insurance scores as the sole reason to cancel, nonrenew or refuse to issue a policy and requires insurers to provide state regulators with actuarial justification for rate increases or decreases based on a consumer’s insurance score. The bill did not take effect, however, until July 1, 2003.

“There probably hasn’t been sufficient time to feather out any problems that may come up subsequent to passage or implementation of the statute we have on the books,” according to Larry Case, executive vice president of the Missouri Association of Insurance Agents.

Missouri Insurance Director Scott Lakin has been a dogged opponent of insurance scoring. PCI state legislative affairs senior vice president John Lobert said “the study was clearly intended to support the Department of Insurance’s view that insurance scores should be banned.”

Local observers said the study and Holden’s swift call for action in response was a calculated political move by an unpopular governor facing a primary challenger in his bid for re-election.

“There are three interest groups [Holden] has catered to,” charged Calvin Call, a lobbyist with the Missouri Insurance Coalition. “Trial attorneys, labor groups and minority groups. This was his favor to minority groups trying to solidify that vote for the primary and general elections. … It was all politics.”

Call said credit scoring is unlikely to be banned because the Republican-led legislature “sees through the governor and the director of insurance’s election-year antics.”

Randy McConnell, a spokesman for the Missouri Department of Insurance, said the report “has been in the works since the fall of 2002” and was only held back because Lakin wanted the National Association of Insurance Commissioners to do a study of its own. After the group’s fall and winter meetings, McConnell said, it became evident no such study was forthcoming, so Lakin decided to release the department’s own study.

“We told the other states that we’d do [the study] on our own and we did,” McConnell said. “How that’s electioneering I have no idea. That’s people who think they can use a broad brush to dismiss report without addressing its findings.”

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Insurance Journal West February 23, 2004
February 23, 2004
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