Consumer groups and lawmakers
plan to urge the Legislature's Joint Committee on Insurance to support a bill
prohibiting insurers from using credit scores in underwriting or to set premiums
for homeowners, renters and even, in the future, auto insurance at a public
hearing at the State House on Tuesday, March 9, 2004.
Senator Charles Shannon,
along with 19 other state Senators filed a bill, "An Act Relative to Insurance
Rates," SB 2093 to prohibit the use of credit scores after the Division
of Insurance withdrew a regulation that would have allowed insurers to use credit
scores for rating and underwriting purposes.
"I am committed to
putting an end to one of the most blatantly anti-consumer practices that I have
seen within this, or any industry. Credit scoring has forced a disproportionate
number of low income and minority residents to pay higher premiums. These higher
rates go straight into the pocket of insurance companies, who appear obsessed
with a profit-at-all-costs mentality. I have yet to hear a reasonable argument
from them on how they can justify equating an individual's credit with a propensity
for a higher claims filing", said an outraged Shannon.
Insurance companies have
developed "credit scoring" computer programs that translate and reduce
information on a consumer's credit report into a single numerical score. A score
is a snapshot of a consumer's credit information at a given moment in time.
Insurance credit scoring is an unreliable and unfair method of underwriting
and pricing insurance. A consumer's credit score can vary widely depending on
such random factors as which of the three major credit bureaus was used to compute
the score, and whether he or she recently refinanced a mortgage or switched
credit cards to get a lower rate. In addition, credit reports are riddled with
errors, and consumers face significant problems getting credit bureaus to remove
inaccurate information.
"Using insurance credit
scores is unfair to consumers. Even if a consumer pays every insurance bill
received on time and has never filed an insurance claim, he or she could still
have a bad insurance score that could result in significantly higher premiums,
or even denial of coverage," said Deirdre Cummings, Consumer Program Director
for MASSPIRG.
Massachusetts law requires
that insurance rates not be excessive, inadequate, or unfairly discriminatory.
"Since several studies indicate that insurance credit scoring may correlate
with race and serve as proxy for other risk factors already considered by insurers,
the use of credit information could produce excessive and unfairly discriminatory
rates," added Florence Hagins, Assistant Director of the Massachusetts
Affordable Housing Alliance (MAHA). Last month, the Missouri Department of Insurance
released the most comprehensive independent study of the issue, demonstrating
that credit scoring disproportionately harms residents of areas with high minority
populations and residents off poor communities.
Underwriting decisions can
have a direct effect on insurance rates. Many insurers have multiple, affiliated
companies that offer insurance coverage. If an insurer uses a consumer's credit
information for underwriting purposes, then the insurer could turn down a consumer
for coverage in one of its affiliates and refer the consumer to a separate affiliate
that charges higher rates," said Stephen D'Amato, a public interest lawyer
and former Director of the State Rating Bureau of the Massachusetts Division
of Insurance. "Unless prohibited, the insurance industries' use of credit
scores for underwriting is basically a backdoor way of using credit information
to determine consumers' rates and avoiding the rate setting process and review,"
explained Brendan Bridgeland, of the Center for Insurance Research.
How Insurance Credit Scoring
Harms Consumers:
Penalizes Good Financial
Management
A good credit history does
not necessarily equal a good score. Insurance credit scores are not simply based
on late payments or bankruptcies, but also on other factors unrelated to financial
responsibility. In fact, insurance credit scoring even can have the effect of
penalizing good financial management. For example, using insurance credit scoring,
a company may raise an individual's insurance premiums or deny coverage simply
because he or she:
- Has a consumer finance
loan rather than a bank loan;
- Has a large number of credit cards, even if they have a zero balance;
- Took out a new loan for any reason, including refinancing a mortgage;
- Switched credit cards to get a lower rate;
- Pays the majority of bills by cash or money order.
Based Upon Inaccurate and
Incomplete Data
Insurance credit scores
derive from credit reports that are often incomplete and inaccurate, which significantly
undermines any potential value credit information may have as a predictor of
future claims.
In 1999, federal regulators discovered that many lenders were not reporting
their customers' account information to the credit bureaus because they did
not want competitors to market to these customers. The practice of withholding
data can lower consumers' scores. In addition, numerous studies have revealed
that credit reports are riddled with errors. A 1998 survey found that 29% of
credit reports surveyed contained errors serious enough to cause the denial
of credit, insurance, employment or other benefits. A more recent 2002 examination
of credit scores found that 20% of individuals with credit histories were at
risk of being misclassified as high risk. The study also found that information
in credit reports varies dramatically among the different credit bureaus. Approximately
one-third of the files had a range of 50 points or greater between credit bureaus.
Moreover, consumers face
great difficulty in correcting inaccurate information on their reports. In fact,
many are forced to sue the credit bureaus to fix errors.
Lacks Meaningful Statistical
Validity
Insurance companies claim
that there is a correlation between a consumer's score and the chance that he
or she will file a future insurance claim. But insurers are keeping their scoring
formulas secret, preventing an independent, public review of the actuarial soundness
of their claim. In addition, any correlation is insufficient to justify the
use of insurance credit scoring. Some studies demonstrate that insurance credit
scoring may simply be a double counting other risk factors, such as policyholders'
geographical locations, that already are taken into consideration when setting
insurance rates. Scores also may be a proxy for rating factors that insurers
are prohibited from using, such as race or income. Insurance companies bear
the burden of demonstrating that insurance rates are not excessive or unfairly
discriminatory. By failing to publicly disclose all the factors used to determine
insurance credit scores, insurance companies have failed to meet this burden.
Harms Low-Income and Minority
Consumers
The use of credit information
in setting insurance prices can have an unfair, disparate impact on low-income
and minority consumers. Studies have shown that traditional credit scores correlate
with race and income, and insurance credit scores may have the same result.
Insurance credit scoring
is based on factors unfair to low-income consumers. The absence of positive
credit information may lower a score just as much as the presence of negative
information. Many models, for example, will lower a consumer's score if he or
she does not have a home mortgage, regardless of how the individual has managed
other credit accounts. In addition, many lower-income consumers use non-traditional
financial institutions, such as check cashing or rent-to-own stores, and these
institutions often do not report information to the credit reporting agencies.
As a result, low-income consumers may be penalized with higher insurance costs
because their credit activity does not show up in the credit reports used by
insurers.
