HB04-1292, sponsored by
Senator Hagedorn, prohibiting insurers from using credit scores in underwriting
or to set premiums for homeowners and counting inquiries as claims passes the
state Senate on second reading. Senator Dyer amended HB04-1292 to make it as
strong as it was when Rep. Larson amended it in the house, to prohibit the use
of credit scoring in homeowner's insurance.
"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 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).
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 Wilmouth.
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.
