Thin ice

Identity theft costs American businesses and consumers a reported $50 billion, and victimizes an estimated 10 million people in the United States each year, according to the Federal Bureau of Investigation. While those numbers are expected to grow, the information-laden insurance industry, even as it advises others to take precautions, is finding itself a target of ID thieves as well.

Recently, computer equipment containing personal information from about 970,000 individuals was stolen from one of AIG’s Midwest offices, although there was no indication that the information was abused or sold. Personal information on 72 workers’ compensation claimants was stolen from Sentry Insurance in Wisconsin and later sold over the Internet. Data on an additional 112,198 claimants also was stolen. And in one episode with an apparently happy ending, a lost computer with the personal information of as many as 540,000 injured New York workers was found. The computer went missing from a secured facility of Chicago-based CS Stars, an independent insurance brokerage, on May 9. CS Stars said the FBI located the computer and that it appeared no one had used any of the information.

Sticky fingers like those have stuck the insurance industry in the middle of another type of ID theft problem, as insurers use consumer credit information for underwriting and pricing. States have been enacting laws to allow consumers who suspect they may be a target of theft to put a freeze on access and changes to their credit reports. Most states that have enacted such laws exempt insurers from the freeze, agreeing that consumers face little risk of ID theft from insurance purchases.

Nine states — Colorado, Florida, Illinois, Kentucky, Wisconsin, South Dakota, Utah, Kansas and Vermont — have passed credit freeze legislation in 2006, all allowing insurers to continue to access credit. However, New York lawmakers recently passed Senate Bill 6805, which does not exempt insurers.

Kristina Baldwin of the Property Casualty Insurers of America, explained why the New York law is unfortunate and an exemption is warranted. “It is highly unlikely that illegally procured credit information would be used to purchase insurance,” she said. “The Federal Trade Commission released a study in January that found that 99.6 percent of identity theft complaints were related to areas other than insurance. Consumers obtain little or no benefit from having a security freeze which applies to insurers.”

Insurers warn that if they cannot freely access consumers’ credit reports, those same consumers could face increased costs and inconveniences. That makes it sound like the victims of identity theft could again be penalized for circumstances that are not their fault.

Years ago, insurers would not have been involved in the credit freeze issue. But with credit scores an important ingredient in rating and underwriting models, they may be over-reacting to what appears to be a basic consumer protection.

Are insurers really inconvenienced by having to turn off credit scoring for victims of ID theft? If a credit score has been unfairly influenced by fraud, how are insurers — or their customers — helped by insurers’ access to that tainted report? In the interest of fairness — and positive customer relations — perhaps insurers should warm up to a little freeze now and then.