Financial Privacy & Security News

SB-216 is a Trojan horse that is business as usual for the insurance industry. The provisions in this bill are used by the insurance industry right now and this is to allow them to continue using credit scoring. The bill was drafted and supported by the industry. It not only codifies industry practice but it also strikes the "No Credit Scoring" provision out of another bill, HB-1292 which 93 legislators voted for earlier in the session. HB-1292 prohibited insurers from using credit scores for homeowners insurance and stopped the industry from counting inquiries as claims. The Senate should reject this version of SB-216 and tell the insurance industry that they are not going to except this Trojan horse.

"CoPIRG is committed to putting an end to one of the most blatantly anti-consumer practices that we have seen within this, or any industry. Credit scoring has forced a disproportionate number of consumers 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 Rex Wilmouth, Director of CoPIRG (Colorado Public Interest Research Group, a consumer advocacy organization). The insurance industry uses credit scoring to figure out who "may file" a claim so they can charge them more. They want to insure the people that won't make claims and pocket the money.

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 interest 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 credit score that could result in significantly higher premiums, or even denial of coverage," said Wilmouth. A consumers premium should be calculated by the condition the house is in and by your driving record not by your credit report.

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. 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.

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 nontraditional 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.