Congress looks into credit based auto insurance rates

By Lisa Zagaroli | McClatchy Newspapers
Posted on Tuesday, October 2, 2007

Go to Original

WASHINGTON — Putting the pedal to the metal has always put people at risk of higher car insurance premiums, but what about making late credit card payments?

Over the last decade, insurers increasingly have relied on customers' credit scores as a factor in determining how much to charge them for automobile insurance.

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, found that credit scores effectively predict the frequency of claims made to auto insurance companies. Using credit scores is likely to mean that 64 percent of African Americans, 53 percent of Hispanics, 38 percent of non-Hispanic whites and 34 percent of Asians would pay higher premiums the FTC said.

"This is totally unfair even if there is some statistical relationship," Rep. Mel Watt, D-N.C., said after a hearing Tuesday on the use of credit-based insurance scores.

"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, the chairman of the oversight and investigations subcommittee of the House Financial Services Committee.

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 they own and the area where the car owner lives, said Robert Hartwig, the 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 also tend to be attentive to how they drive, service their vehicles and maintain their homes.

Nevertheless, at least four states — California, Hawaii, New Jersey and Massachusetts — have banned the practice of credit-based insurance scores.

Washington state Insurance Commissioner Mike Kreidler said that anyone with a teenage driver in the household knows about risks being considered in their 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.

Nathaniel Shapo, a former Illinois insurance commissioner, told lawmakers that the practice is beneficial to consumers because it means that 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 that some minorities live shorter lives. He said there's no correlation between race and driving records, but there is a known link between race and credit scores.

"Is there something else I need to know?" he asked.

The FTC report found that the scores have a "relatively small" chance of being a direct substitute or "proxy" for race or ethnicity, factors that can't be used to determine premiums. FTC Commissioner J. Thomas Rosch said it's unclear from the data why there's an association between scores and risk.

Hartwig said that banning the use of credit scoring would harm millions of minorities, as well as others with limited incomes who have great credit scores and are paying lower insurance premiums because they do.

The FTC is also planning a study of whether credit is a fair predictor of home insurance claims.

Because of criticism over the voluntary data it used in the car insurance study, Rosch announced Tuesday that the commission would use its authority to make the data mandatory.

ON THE WEB

Read FTC Commissioner Rosch's testimony to Congress.

Read the full FDA report on credit-based insurance scores.

See further information from the FDA.

(In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. Just-Off-The-Cuff has no affiliation whatsoever with the originator of this article nor is Just-Off-The-Cuff endorsed or sponsored by the originator.)

"Go to Original" links are provided as a convenience to our readers and allow for verification of authenticity. However, as originating pages are often updated by their originating host sites, the versions posted on JOTC may not match the versions our readers view when clicking the "Go to Original" links.