Insurers' use of credit scores criticized
LISA ZAGAROLI
WASHINGTON --Putting the pedal to the metal has always put people at risk of increased car insurance premiums, but what about making late credit card payments?
Insurers over the past decade have increasingly relied on individuals' credit scores to help determine how much automobile insurance will cost.
It's a practice that has some lawmakers crying foul because of evidence that it disproportionately affects some minority groups.
A Federal Trade Commission report, requested by Congress and made public in July, found that credit scores effectively predict the frequency of claims made to auto insurance companies.
"This is totally unfair, even if there is some statistical relationship," Rep. Mel Watt, D-N.C., of Charlotte, said following a hearing Tuesday on whether credit-based insurance scores disproportionately affect African Americans and Hispanics.
"That might be equivalent to having your driving history determine whether you get a bank loan, or the interest rate you will pay on the loan," said Watt, chairman of the oversight and investigations subcommittee of the House Financial Services Committee.
He called the hearing to evaluate whether the federal government should prohibit or restrict the use of credit scores in setting insurance premiums.
Watt said after the meeting, which drew a packed committee room, that he might introduce legislation on the issue.
Insurance companies were quick to defend the practice as sound actuarial policy and an excellent indicator of risk.
Insurers typically give more weight to factors such as an individual's driving record, the type of vehicle he owns and the area where the car owner lives, said Robert Hartwig, president of the Insurance Information Institute, a trade group for insurers.
A report issued by his group suggests that people who are careful money managers tend to also be attentive to how they drive, service their vehicles and maintain their homes.
In North Carolina, a person's credit history can't be used as the sole factor in denying coverage or changing a rate, said Chrissy Pearson, a spokeswoman for the N.C. Department of Insurance. It can be reviewed in conjunction with other factors.
At least four states, California, Hawaii, New Jersey and Massachusetts, have banned the practice of using credit history to set insurance rates.
Washington state Insurance Commissioner Mike Kreidler said anyone with a teenage driver in his household knows about risks being considered in his insurance premiums.
"But it is our responsibility as regulators to ensure that credit scoring does not unfairly discriminate and harm protected classes of people," he said in explaining the tight restrictions his state uses.
Former Illinois Insurance Commissioner Nathaniel Shapo told lawmakers that the practice is beneficial to consumers because good drivers are less likely to have to underwrite the cost of bad drivers.
Watt noted that the practice of using race to set life insurance rates has already been banned, despite plentiful data showing that some minorities live shorter lives.
He said there's no correlation between race and someone's driving record, but there is a known link between race and credit score.
The use of credit scores is likely to lead to increased premiums for 64 percent of African Americans, 53 percent of Hispanics, 38 percent of non-Hispanic whites and 34 percent of Asians, the FTC said.
But the scores have a "relatively small" chance of being a direct substitute or "proxy" for race or ethnicity, factors which can't be used to determine premiums. FTC Commissioner Thomas Rosch said the data don't explain the association between scores and risk.
N.C. Credit Score Use
The N.C. Department of Insurance has received 12 complaints this year about the use of credit scores for auto and housing insurance, said spokeswoman Kristin Milam. There have been 44 complaints about the use since 2004.
S.C. car insurance companies are prohibited from using credit scores as the sole basis in determining auto rates under a law that took effect in 2003. State consumer officials said they received many calls about credit scores and insurance rates three or four years ago, but haven't heard of any issues during the past eight to 12 months, said Ann Roberson, spokeswoman for the S.C. Department of Insurance.
Jayne Cannon, public relations manager with AAA Carolinas, said the company receives calls from customers wanting to know how insurance rates are determined. The company tells applicants that it will use their credit score as a factor in determining rates
"History has shown that people who have spotty credit are more likely to file claims, and are more likely to be not as careful with their automobile and their driving records as people who have pristine records," Cannon said.
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