A hearing on the use of credit scores in insurance was held May 21 before the Subcommittee on Oversight and Investigations of the House Financial Services Committee. Two bills have been introduced that would either limit or outright remove the use of credit scores as a tool to determine insurance rates and availability.
One bill (H.R. 5633), introduced in March by Rep. Luis Gutierrez (D-Ill), would amend the Fair Credit Reporting Act by prohibiting the use of credit-based insurance scores if the Federal Trade Commission finds evidence of racial discrimination, either directly or as a proxy. The second bill (H.R. 6062), introduced in May by Rep. Maxine Waters (D-Calif.), would prohibit the use of credit-based insurances scores entirely.
“If you have a good driving record,” said Rep. Gutierrez, “stop at stop signs, don’t go through red lights, don’t speed ... if you act in all of these responsible manners, you should get a good insurance rate regardless of what your credit score would be.” Rep. Waters, in supporting the bill, fumed over insurance companies considering such items as credit history and grade point average to determine rates on automobile insurance. “Low GPA means a worse driver? That is absolutely nonsensical. I know plenty of intelligent people who have made good grades but couldn’t find their way to a toilet,” she said.
Panelists supporting the use of using credit scores pointed to the accuracy of the scores with regard to claims. “The fundamental reason why insurance scoring is good practice is that it is an extremely powerful and accurate prediction of insured losses,” said Lawrence Powell, professor at the University of Arkansas at Little Rock. “Consumers with low scores submit more claims than those with high credit scores.”
A Federal Trade Commission report issued last year said that credit scores effectively predict the frequency of claims made to auto insurance companies. It said there was a “relatively small” chance of the scores being used as a direct substitute or “proxy” for race or ethnicity. The FTC announced on May 20 that it would use its subpoena power to gather data from the nation's nine largest insurance companies for the next part of its study, which will examine the use of credit scoring on home insurance premiums.
Watt: Don’t Use Credit Score in Figuring Car Premiums (Charlotte N.C. Observer 5/22/08)
May 28, 2008