NAMIC Public Policy Director: ‘Disparate Impact’ Theory Provides No Support for Banning Credit-Based Scoring

April 18, 2005

In a “Legal Backgrounder” published by the Washington Legal Foundation (WLF), National Association of Mutual Insurance Companies (NAMIC) Public Policy Director Robert Detlefsen explained why group variations with respect to credit scores do not justify restricting the use of credit-based insurance scoring.

The WLF paper comments on a landmark study by the Texas Department of Insurance, which confirmed NAMIC’s long-standing contention that credit-based insurance scoring allows insurers to more accurately assess and price risk for both auto and homeowners insurance.

In particular, the paper explores the implications of the TDI study’s controversial finding that average credit scores vary among different racial and ethnic subgroups within the population. Some policymakers and consumerists have cited that aspect of the TDI study to demand that credit-based insurance scoring be prohibited because it produces a “disparate impact” among groups.

Detlefsen explained that disparate-impact analysis was originally conceived as a legal theory for use in Title VII employment discrimination lawsuits.

Examining recent case law, he found that “courts have increasingly come to recognize that serious economic problems would result if the Title VII version of the disparate impact doctrine became the template from which courts, legislatures, and administrative agencies reflexively construct disparate impact standards for other areas of commerce,” such as financial services.

“If lenders and credit card issuers can cite legitimate business justifications for race-neutral evaluation criteria that produce disparate impacts,” wrote Detlefsen, “it seems reasonable to infer that insurers should be allowed to do the same.”

Detlefsen’s analysis is reportedly supported by an emerging consensus among legal scholars that in disparate impact cases brought under the Fair Housing Act and the Equal Credit Opportunity Act, plaintiffs should be required to identify an equally effective alternative practice that would have less of a disparate impact than the challenged practice, and courts should consider the cost to a defendant of adopting and maintaining the alternative practice.

“In a legislative or regulatory setting,” Detlefsen concluded, “it follows that this burden should rest with the policymaking body. If policymakers believe that an alternative to insurance scoring exists that produces less of a disparate impact, that is no more expensive to use, and that is equally effective in achieving the legitimate business purpose of assessing risk, let them identify it.”

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