Committee to investigate insurers’ credit-score use

Members of the House Financial Services Committee will delve into insurers’ use of credit scores in a hearing next week, placing the controversial findings of a Federal Trade Commission (FTC) report in the spotlight.

The FTC concluded that credit-based insurance scores were “effective predictors of risk” that “may benefit consumers overall” in a recent report to Congress that was hailed by the industry but blasted by consumer and civil rights groups as deeply flawed.

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The study, which focused on the automobile insurance market, also drew a dissent from one of the FTC’s commissioners, Pamela Jones Harbour.

The chairman of the oversight panel holding the hearing, Rep. Mel Watt (D-N.C.), has questioned the methodology of the FTC report yet suggested that it confirms his belief that credit-based insurance scoring results in a racial bias.

“The FTC report raises serious concerns about the impact of the growing use of credit-based insurance scores that demonstrate a proxy effect for minorities,” he said in a statement posted to his website.

Watt has not said whether he will introduce legislation to ban insurers from using credit scores. His panel’s hearing will include testimony from insurance commissioners from two states, Washington and Hawaii, that have reined in the practice. In addition, FTC Commissioner J. Thomas Rosch, who concurred with the FTC’s findings, will testify.

The hearing previously had been scheduled for late July, but was canceled at the last minute amid Republican complaints regarding witnesses. The panel’s ranking member, Rep. Gary Miller (R-Calif.), had threatened to walk out after his opening statement because Democrats had not enlisted an FTC representative to testify.

A spokesman for Miller said, “The issue has been resolved and Mr. Miller looks forward to participating in the hearing on Tuesday.”

Credit-based insurance scoring is used widely by insurers to assess risk for homeowner and automobile policies. In 2003, Congress mandated the FTC study and also ordered the Federal Reserve Board to research the use of credit scores in mortgage underwriting. Released earlier this month, the Fed report concluded that credit scores vary substantially among races and ethnic groups but are a good predictor of borrowers’ ability to meet mortgage payments.

In her dissent of the FTC study, Commissioner Harbour took strong exception to its methodology. In particular, she criticized the study’s reliance solely on information that insurers agreed to hand over or data that was publicly available. Consumer and other advocacy groups echoed her concerns.

Critics of credit-based insurance scoring question its fairness and usefulness, arguing that the credit scores are a proxy for race and income, factors that insurers are prohibited from using to assess risk.

However, the FTC study found that credit scores have “only a small effect” as a proxy for membership in racial or ethnic groups.

Insurers argue that credit scores are a potent tool that allows them to set rates more accurately and offer coverage to more consumers.

“The use of credit-based insurance scores was introduced more than a decade ago and has helped expand the availability of insurance in many markets and increased competition among insurers,” the president of the American Insurance Association, Marc Racicot, said.

“Over history, it’s been a good indicator of risk. The better your credit is, the lower your risk. You’re less likely to have an accident or even an auto claim,” the senior federal affairs director for the National Association of Mutual Insurance Companies (NAMIC), Marliss Browder, said.

The consumer and civil rights groups that have been pushing states to ban the practice are now turning their attention to Congress.

The director of insurance for the Consumer Federation of America, Robert J. Hunter, called the credit-based insurance scoring a “black box” that is poorly understood by consumers. “People understand that if they have accidents, their rates go up. But they don’t understand why their rate should go up if their credit score goes up,” he explained.

Hunter, who questions the results of the FTC study, also argued that credit-based insurance scoring should be banned even if a link between credit scores and risk were firmly established. “I don’t agree that just a correlation is sufficient, even if there is a correlation,” he said.