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 (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 immediately 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.”
Joe Thesing, a specialist in Missouri affairs for the Indianapolis-based National Association of Mutual Insurance Cos. amplified the point about zip codes.
“Most professional researchers think zip codes are far too large for accurate analysis,” he said. “As an example, several variances within a zip code can markedly skew the findings. The most accurate research conducted on this issue has looked at the impact of insurance scores on individual policyholders because insurance is sold to individuals and not a group of people in a particular zip code.”
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.
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.”
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