Article Number 10
GetCoveredUSA.com
April 11, 2008

BILL TO BAN CREDIT SCORING SUFFERS DEFEAT IN LEGISLATURE

Credit scoring in Colorado stays for now after a bill to ban usage of consumer credit reports as a factor in determining insurance rates. The legislation failed after a vote of 26 to 39 was issued by the Colorado State Legislature. Credit scoring when used to determine insurance rates has been studied vigorously by insurance companies and consumer advocates, results generally favor the side who conducts the study. Insurance companies vigorously defend their use of consumer reports as a factor in predicting what type of person might be more prone to file a claim. However, with current economical conditions and recent problems with housing and job stability, more and more people end up with blotches on their credit than before. Does this mean that more claims will be filed? Time will only tell.

INSURANCE DISCRIMINATION BASED ON RACE?

Though it is illegal to discriminate based on race, a 2005 study in Texas from the Texas Department of Insurance discovered that even though consumer credit information may accurately predict the likelihood of hoeowners or auto claims, it also found that use of such information disproportionaltely impacts black and hispanic policyholders. This finding was made using data from the credit scoring models of six personal lines insurers operating in texas which encompasses approximately 1.2 million auto and 800k home policies. The analysis used an univariate method to compare credit score to pure premium and found a strong relationship between credit score and insurance risk. In the case of personal auto policies, as the credit score worsened, the researchers found the average loss per vehicle increased and the inverse was found for better credit risks.

Using supplimental data from the Texas Department of Public Safety, the researchers found that blacks had average credit scores that were 10 to 35% worse than the average scores for whites. Hispanics had average scores that were 5 to 25% worse than whites and Asians were found to have equal or sligthly worse scores when compared to whites. With this data, we can directly correlate higher insurance rates to blacks and hispanics. Even though there is still a strong case that they will make more claims than the average white household.

RECENT ACTIONS BY OTHER STATES THAT RESTRICT OR BAN CREDIT SCORING FOR INSURANCE

• Federal Activities: After several years of extensive research, the Federal Trade Commission (FTC) has found that auto insurers' use of insurance credit scores leads to more accurate underwriting of auto insurance policies in that there is a correlation between insurance scores and the likelihood of filing an insurance claim. The FTC report, Credit-Based Insurance Scores: Impacts on Consumers of Automobile Insurance, also states that credit scores cannot easily be used as a proxy for race and ethnic origin. In other words, credit scoring predicted risk for members of minority groups in much the same way that it predicted risk for members of non minority groups. The Fair and Accurate Credit Transaction Act of 2003 directed the FTC to address the issue of whether the use of credit had a disparate impact on the availability and affordability of insurance for minorities. Based on a poll of consumers, the General Accountability Office has recommended that the Treasury and FTC take steps to improve consumers' understanding of credit scoring and how credit histories are used, targeting in particular those with less education and less experience in obtaining credit.
  
• House Bill HR 5633 IH Mar 13, 2008: To amend the Fair Credit Reporting Act to prohibit certain discriminatory uses of consumer reports and consumer information in connection with certain personal lines of insurance, and for other purposes. In other words, a federal ban on the use of consumer reports and consumer information in certain personal lines of insurance. This bill was introduced in Mar 08 and is in the first step of the legislative process. It could undergo many changes before it comes for a vote or is dropped completely.
• The Federal Reserve also studied the use of credit scoring. Although looking at credit scoring to quantify risk posed by a borrower rather than an applicant for insurance or a policyholder, the Federal Reserve said in a report issued at the end of August 2007 that credit scores were predictive of credit risk and were not proxies or substitutes for race ethnicity or gender, underscoring the FTC study.
  
• A number of states have introduced legislation this year to ban the use of credit in homeowners and auto insurance underwriting. In three states, Kentucky, Nebraska and Washington, no action was taken and the legislation remains in committee. In Wisconsin the measure passed the Senate by a narrow margin and is now being considered by the House.
• Massachusetts: Insurance Commissioner Nonnie S. Burnes in drafting regulations for this years move to auto insurance competition, decided that companies should not be allowed to use a driver's credit history to set rates or decide whom to insure.
• Delaware: A compromise bill on credit scoring was worked out that would still make the state one of the most restrictive. The bill originally banned the use of credit scoring for homeowners and auto insurance but was amended to prohibit insurers from using credit as the sole determinant of new policy underwriting and rating decisions, similar to provisions that already existed. However, at the policyholder request, an insurer must re-rate the policy based on the current credit report. The bill prohibits insurers from increasing premiums on renewal due to a change in credit history. The law took effect in January 2008.
  
• Oregon: Voters rejected Oregon ballot initiative 42 that would have banned insurers' use of insurance scores in rating and underwriting. Currently, insurers doing business in the state must notify policyholders if use of their credit history results in an adverse decision and they may not use credit as a justification for canceling or non-renewing a homeowners or auto insurance policy.
• New Mexico: Insurers and the state's insurance department have launched a campaign to help the public understand the state's credit-based scoring law. The law is based on the National Conference of Insurance Legislators (NCOIL) model law, which protects consumers whose credit has been lowered by financial difficulties following a divorce, illness or other �??extraordinary life circumstances.�?� The New Mexico law also protects people who have no credit history.
• In June 2007, the U.S. Supreme Court overturned appeals court rulings in two cases that centered on when insurers are required to send consumers notices to comply with the Fair Credit Reporting Act (FCRA). Siding with insurers on the issue, the high court said that the companies were not breaking the law. The 9th Circuit court had ruled in the first case that an insurer must issue adverse action notices whenever a consumer's credit information does not result in the consumer receiving the best possible rate but the high court said that such actions would result in too many notices being sent that were likely to be ignored. In the second case, it said that the company had not acted recklessly in willful disregard of the law.
  

INSURERS WINNING BATTLE OVER CREDIT SCORING USE IN MOST STATES

In July of Last year, Nevada's bill to remove the use of Credit Scoring as a factor for determining insurance rates ended in in a total defeat. How are insurers winning the battle? By making it very difficult to understand how each insurer is using the result as a direct correlation to their particular rate structure. Each insurer has a base rate that is filed with the Department of Insurance for each state they write business in and from there they discount that rate depending on many factors such as Age, Loss History, Employment, Credit Score, Zip Code, State and so on. The rating structure can become so complex, that you have to learn the entire structure for that company and how each factor effects it to determine how much a person may be graded off based on credit. To make it even more difficult to understand, each company runs a different risk model than the next, so in order to get a complete picture, the rate model of each company must be studied in depth and compared to have an accurate result. Just like the formula for our favorite soft drinks, a risk model for an insurance company is going to be a very protected secret. The way that they have to file rates with the Departments of Insurance for each state, allow them to be vague on how they come up with the actual rate that you end up paying.

GetCoveredUSA.com TIP: Some insurance companies use Credit as a stronger risk factor than others! If you have good credit, you might do well with Company A that uses Credit Scoring as a major factor in rates, so if you are using Company B, you might not be getting the best value for your insurance dollar possible! This also works inversely for those who have less than perfect credit, because Company A might not be the best place to award their business to.

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