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Insurance Credit Scoring Now Spawns Less Anger

Bob Mueller July 2007

Roughly a decade after insurance carriers began adding customers' credit scores to the stew of statistics used to set premiums for auto and homeowner's coverage, negative reaction and feedback appears to be waning.

Opponents still contend that credit scoring tends to raise premiums overall, that it doesn't correlate directly with risk and that it may serve as a proxy for racial and ethnic discrimination, because some minority groups have lower incomes and are more likely to have credit problems.

But the insurance industry maintains that the majority of customers-though an admittedly narrow majority-saves money thanks to credit scoring. They argue that the way consumers manage credit is a reliable indicator of responsibility and, consequently, of habits less likely to result in claims. Moreover, they point out that credit ratings are just one of many factors carriers consider when they set rates and that credit histories are blind to race and ethnicity.

"Increased use of credit information is a fact of life," says Claire Wilkinson, vice president of the Insurance Information Institute (III) in New York. "It's a proven, reliable indicator of performance in many trust-based relationships." Among insurers, she adds, studies show that lower credit scores are associated with higher relative loss ratios.

"Generally speaking, the legislative and regulatory activity regarding the use of credit scoring has decreased over the last couple of years," says Michael Forney, a spokesman for Allstate in Northbrook, Ill. "We believe this is due in large part to the NCOIL [National Conference of Insurance Legislators] model law on the use of credit information."

The NCOIL Model Act, introduced in November 2002, spells out protections against potential abuses of credit scoring. It requires insurers to re-rate customers with corrected credit reports, notify applicants that credit information is being used in setting rates and let customers know if their credit information results in an adverse action-a higher premium, for example, or denial of coverage. It also protects consumers' privacy. So far, about half the states have adopted the NCOIL model.

Another reason for the decline in opposition is that consumers are becoming more familiar with credit ratings, thanks to their wide use in other financial services industries, says Jeffrey Junkas, director of public affairs at the American Insurance Association's Chicago office. "We've seen fewer overall, country-wide attacks on credit-based insurance scoring," he says, "but we still do see some fiery pockets of opposition in certain states, such as Michigan or Delaware, where they continue to attack the tool."

In Delaware, says Junkas, there are conflicting efforts both to adopt the NCOIL model and to ban credit scoring altogether. In Michigan, he notes, the insurance commissioner tried to institute a regulatory ban on the practice. The industry sued to prevent that and won. The commissioner appealed that decision, and the result of that appeal is imminent. In Colorado, Junkas says, action against credit scoring is "bubbling right near the surface."

On the Federal front, two studies-one on credit scoring in the insurance industry by the Federal Trade Commission and another on broader use of credit information by the Federal Reserve-were both undertaken in connection with reauthorizing the Fair Credit Reporting Act and could provide ammunition to both sides of the issue. Junkas says, however, that he doesn't foresee any direct action against credit scoring coming out of either study. And in June, the Supreme Court unanimously sided with the insurance community by overturning a previous rule that required insurers to issue adverse action notices whenever use of credit data prohibited the policyholder from getting the best possible rate.

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