View this article online: https://www.insurancejournal.com/magazines/mag-editorsnote/2007/08/06/82719.htm

Credit score concern

Debate on insurers’ use of credit scores in automobile underwriting and rating is heating up again, thanks to the Federal Trade Commission’s recently released, long awaited study, “Credit-Based Insurance Scores: Impacts on Consumers of Automobile Insurance.” Insurers overall felt vindicated, as the study supports their message that the use of credit in underwriting helps most consumers, particularly those who may not have great statistics in other areas. Having a better credit score actually gives those consumers a better chance for coverage, insurers say.

“The FTC study of automobile insurers’ use of credit has reaffirmed the strong connection between credit information and the risk of loss and has determined that its use helps to increase the availability and affordability of insurance for most consumers,” the Property Casualty Insurers Association of America (PCI) said in a written statement.

Some of the report’s major conclusions, according to the insurance industry, are as follows:

• Insurance scores are effective predictors of risk under automobile policies. Scores are predictive of the number of claims consumers file and the total cost of those claims. The use of scores is therefore likely to make the price of insurance better match the risk of loss posed by the consumer. On average, higher-risk consumers will pay higher premiums and lower-risk consumers will pay lower premiums.
• Use of credit-based insurance scores may result in benefits for consumers. For example, scores permit insurance companies to evaluate risk with greater accuracy, which may make them more willing to offer insurance to higher-risk consumers for whom they would otherwise not be able to determine an appropriate premium. Scores also may make the process of granting and pricing insurance quicker and cheaper — cost savings that may be passed on to consumers in the form of lower premiums.
• Credit-based insurance scores appear to have little effect as a “proxy” for membership in racial and ethnic groups in decisions related to insurance. The relationship between scores and claims risk remains strong when controls for race, ethnicity and neighborhood income are included in statistical models of risk.

However, The Center for Economic Justice and other consumer groups disagree, crying foul play and saying that African American and Hispanic minorities are indeed negatively affected by the use of credit — whether intentional or not. CEJ’s Birny Birnbaum provides his perspective on the FTC study in the Closing Quote on page 62 of this issue.

Meanwhile, a Congressional hearing on the FTC study and the use of credit scores at the state level that was scheduled for July 27, was cancelled by U.S. Representative Melvin L. Watt, D-N.C., chairman of the Subcommittee on Oversight and Investigations. Watt expressed hope to hear from a wide array of interested parties –insurers included.

Before the hearing was cancelled, no industry representatives had signed up to testify, only consumer advocates and one regulator. With the debate squarely in Congress’ lap, the insurance industry would be wise to sign up on the list to testify — whenever the hearing is rescheduled.