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Credit Based Insurance Scoring Stirs Debate

Credit-based insurance scoring is a practice in the auto industry which evolved out of traditional credit scores. Auto insurance providers began using these scores in the mid-1990s, and today every major auto insurer across the country uses credit-based insurance scoring in their determination of policy rates to some extent. They use these scores to help them assign customers to risk pools and to set premium rates [1]. This method of the use of credit scores by auto insurers has been the source of much contentious debate over at least the past few years, and has recently shown up in legislative chambers across the country.

Washington State H.B. 2514

H.B. 2513 in the Washington state House of Representatives was introduced to the House by Washington Insurance Commissioner Mike Kriedler. Kriedler's bill is seeking to prohibit insurance companies in his home state from using credit, education, or income information in their policy underwriting and pricing practices. This bill would continue to allow discounts for good students, as well as drivers who successfully complete drivers education training courses.

Kriedler believes that credit-based insurance scoring is unfair because under this scoring system, consumers can end up facing high premium rates even when they have perfect driving records. Industry leaders in the state have been lobbying against passage of the measure, maintaining that insurance scoring based on credit actually helps most consumers [2].

Other States' Insurance-Based Legislation

The Michigan legislature is also considering a similar ban on the use of credit-based scoring in the computation of auto premiums. The Michigan House of Representatives approved such a ban in early December of 2009 as part of a package of auto insurance reform bills voted on and sent to the Senate, but the Senate has yet to act on any of this legislation. Auto industry lobbyists have been working hard to defeat the measure in the Senate ever since it passed the state House.

What has transpired in Michigan is similar to a pattern seen in some other states like Connecticut and others, where public support does seem to be initially behind legislation banning credit-based insurance scoring, but the industry lobby is able to diffuse momentum behind the passage of such legislation often before it hits the Senate floor for open debate. The topic has been a matter of contention for at least a handful of years, and the general disagreement between those who are in favor of banning its use and those who tend to defend it generally follows a similar pattern. A look at the 2007 Federal Trade Commission (FTC) report to Congress on credit-based insurance scoring gives insight into some of the complaints critics have about the practice, but also some of the main arguments used by proponents of credit-based insurance scoring to defend the practice and its usefulness.

FTC Credit-Based Scoring Report

The FTC was assigned the task of examining all sides of the debate surrounding the use of credit-based scoring the the auto insurance industry, and to present a report to Congress on the matter in the summer of 2007. In its conclusion, the commission explained that in its opinion, credit-based insurance scoring is useful in helping providers to set rates, and that the practice is not discriminatory against racial or ethnic minorities [1].

One of the most compelling points that came out of the FTC report was a simple clarification of exactly what these credit-based insurance scores are used for. According to the report, insurance companies do not use these scores to predict payment behavior-such as whether a customer will pay for premiums on time-but rather as a factor in estimating the number and total cost of insurance claims that prospective policy holders or customers renewing policies are likely to file [1]. This would seem to be an important distinction, because it disagrees with the arguments of many critics of the practice who say it discriminates against low-income customers in looking at their credit history. But if the use of such research is to predict essentially driving behavior and not payment behavior, the whole intended focus of these scores shifts entirely.

Insurers who espouse the credit-based scoring system argue that this method of scoring helps them to evaluate risk much more accurately than any other indirect means available to them. Since insurers cannot follow drivers around to assess their performance and driving behaviors, they must use indirect means to extrapolate certain generalizations about risk. They say that credit-based insurance scoring gives them a greater ability to charge premiums to individual policy holders that more closely reflect the actual risk they may pose as insured customers.

NAMIC Weighs in on Debate

There are numerous organizations and lobby groups on all sides of the debate surrounding industry use of credit-based insurance scoring. For example, the National Association of Mutual Insurance Companies (NAMIC), a powerful lobbying group, supports credit-based scoring based on a number of reasons. Like most industry professionals, NAMIC representatives feel that credit-based scoring actually helps most auto insurance consumers. They see it as both a valid and accurate predictor of claims and losses, and substantiate these claims with decades' worth of research data.

Part of the reason NAMIC is in favor of credit-based scoring is that provides insurers with an inexpensive tool to use in assigning risk. This allows providers to set their pricing in a much more efficient way, saving them operating expenses and allowing them to keep costs low for deserving auto owners. They say that credit-based insurance scoring allows auto insurance providers the ability to extend offers of coverage to more customers, as well as the power to write more low-priced policies than they could without such a useful underwriting tool.

NAMIC has been actively engaged in the nationwide debate over the practice. In 2009 the group was instrumental in helping get Connecticut's H.B. 6444 substantially modified before it even passes the House floor and headed to the Senate. The bill originally called for the banning of credit-based insurance scoring as one of its provisions; but this portion was significantly watered down by the time it passed the House in May, only calling to prohibit companies from using a customer's credit history as a sole basis for denying, canceling, or not renewing a policy [3].

The involvement in industry lobby groups in the long-range discussions of the merits and drawbacks of a system that has been in use for around 15 years now surely seems like a dubious fact to critics. But it is hard to fault an industry seeking to protect its own interests and maintain a system that has saved it substantial money and allowed it to operate more efficiently for at least a decade.

The issue of auto insurance credit-based scoring as a significant deciding factor in the determination of premium rates is one that has increased in intensity over the past few years. But even as the interest has built up in both the public and political arenas in discussing and debating the practice, there as of yet has been no clear mandate for a specific direction to go, no definite consensus one way or the other.

[1] http://www.ftc.gov/os/2007/07/P044804FACTA_Report_Credit-Based_Insurance_Scores.pdf
Retrieved 2010-01-21.
[2] http://insurancenewsnet.com/article.aspx?id=153577&type=newswires Retrieved 2010-01-21.
[3] http://www.namic.org/newsreleases09/090218nr1.asp Retrieved 2010-01-21.

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