Should credit scoring be used to determine insurance rates?
The National Consumer Law Center says insurer use of credit scoring “creates wide racial disparities and is fundamentally unfair to consumers”, but carriers argue the tool actually lowers premiums for most and encourages them to write more coverage.
Recently, the House Subcommittee on Financial Institutions and Consumer Credit, part of the House Financial Services Committee examined this issue.
Regulators are presently investigating the following:
- The components of an insurance score;
- The extent to which any one rating factor affects a consumer;
- Whether consumers have an appropriate understanding of the credit factors that affect a particular insurance policy; and
- Whether insurance score vendors should be subject to enhanced transparency or supervision.
David Snyder, American Insurance Association vice president and associate general counsel, appeared before the subcommittee and stated that credit scoring provides an objective, cost effective risk measurement tool for all, components of auto insurance coverage. In addition “by providing a comparative and quantitative measure for each risk, it has allowed insurers to move toward pricing which is much more tailored to individual risk, replacing the old system that relied exclusively on large group classifications, such as geographic territory or age.” Finally, he said insurers say “they have more confidence that they are able to accurately predict and price for all levels of risk”. In short, credit scoring encourages them to write more coverage.
Without credit scoring there will be higher premiums for most consumers and less availability of insurance for marginal insurance risks according to Ms. Fortney, whose law firm specializes in consumer financial services.
Many critics argue that data supports the notion that the use of credit scoring has a higher than average impact on the poor and minorities. But Ms. Fortney says that “the existence of a disparate impact on a protected group would not, standing alone, constitute a violation of the Fair Housing Act or the Equal Credit Opportunity Act.
Currently 48 states regulate the use of credit scores for insurance and none allow scores to be used as the sole basis for increasing rates or denying, cancelling or non-renewing policies.
What do you say?