Insurers’ Use of Credit Scores on Agenda on Capitol Hill Today

October 2, 2007

U.S. Rep. Melvin L. Watt, D-N.C., chairman of the House Subcommittee on Oversight and Investigations, will oversee a hearing today on Capitol Hill to consider the implications for consumers of the growing use of credit-based scores by insurers.

Watt said the hearing will zero-in on a Federal Trade Commission report to Congress entitled, “Credit-Based Insurance Scores: Impacts on Consumers of Automobile Insurance” and examine its key findings.

The hearing will also study the efforts underway by the states to regulate the use of credit-based insurance scores.

Insurers will try to convince some legislators with doubts that the use of credit scores is fair.

Watt himself has said he thinks the FTC report “raises serious concerns about the impact of the growing use of credit-based insurance scores that demonstrate a proxy effect for minorities.”

He has questioned the research methodology that was used for the FTC report.

Watt is not alone in his doubts about the FTC report and credit scores.

“The FTC report confirms some of our initial concerns about the fairness of credit-based insurance scoring when it comes to Latinos and African-Americans,” Congressman Luis Gutierrez, D-lll, has stated.

Marc Racicot, president of the American Insurance Association (AIA), will defend the FTC report and tell the subcommittee that it is just the latest proof that credit-based insurance scores are fair and beneficial to a vast majority of consumers.

“There is no question that credit-based insurance scores are an efficient and accurate predictor of risk,” Racicot’s will say in his testimony. “Their use helps insurers refine their pricing to better reflect an individual’s risk profile resulting in most consumers paying less for insurance.”

According to the AIA, the FTC’s study “firmly validates the insurance risk assessment capabilities and consumer benefits of credit-based insurance scores. Most people pay less for insurance because of insurer use of credit, which the FTC’s study, and numerous state studies have confirmed.”

AIA says that the FTC study “directly refutes unfounded claims that insurers use credit-based insurance scores to ‘unfairly target’ minorities.” The FTC study shows there is no way to determine a person’s race, ethnicity or economic status by simply looking at an insurance score, according to Racicot.

Also putting forth the industry’s case will be the Property Casualty Insurers Association of America (PCI).

“We believe the FTC report speaks volumes about the value of credit scoring as a highly predictive underwriting and rating tool,” says Ben McKay, PCI’s senior vice president, federal government relations. “The use of credit information allows for more accurate pricing and saves many consumers money on their automobile and homeowners’ insurance policies. Consumers want to pay a fair price for their insurance that matches their risk of loss. Insurers simply want to use the most accurate, statistically valid tools available to achieve that goal, and credit information has proven to be one of the most accurate methods of predicting losses.”

Insurer use of credit is largely governed by dozens of state laws and regulations, including what is considered standard practice in the market, the National Conference of Insurance Legislators (NCOIL) model act on credit, which 26 states have adopted. It allows the use of credit scores but does not allow credit to be the sole determining factor for coverage or non-renewal. It also allows an exemption to insurer use of credit due to “special life circumstances” for things such as a spouse’s death or an unexpected medical emergency.

Among others scheduled to testify beginning at 2 pm today are J. Thomas Rosch, commissioner, Federal Trade Commission; J. P. Schmidt, Hawaii commissioner of insurance; Mike Kreidler, Washignton commissioner of insurance; Birny Birnbaum, executive director, Center for Economic Justice; and Eric Rodriguez, deputy vice president, National Council of LaRaza.

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