A group of Massachusetts insurance agents even threatend to put up a ban on insurance scoring
Decades after insurers began looking at the connection between credit history and claims, there’s little debate that the practice helps companies. Whether it aids consumers is another matter: Industry advocates say the practice helps more people than it harms, while critics insist the practice is harsh to minorities and makes coverage more expensive for people who most need it.
A year ago this month, Massachusetts Gov. Deval Patrick signed a law to ban insurance scoring, codifying what regulators were doing already. Today, activity in the states is quiet, though the use of credit factors remains an ongoing discussion topic. Four years after the recession began, consumer advocates ask: If we have gone through a period of economic disruption, are the scores still reliable? Is it fair to use them?
Insurers continue to say yes. Widely cited is a 2007 study (PDF) by the Federal Trade Commission, which found that scores “effectively predict the number of claims consumers file and the total cost of those claims,” according to an FTC statement that accompanied the study’s release.
Not all agree. A group of Massachusetts insurance agents threatened to put an insurance scoring ban on the ballot until Gov. Patrick acted. Birny Birnbaum, of the Center for Economic Justice, says consumers
have been “hammered” the financial crisis and the recession, resulting in record high rates of delinquent payments, foreclosures and bankruptcies. While insurers have historically argued that credit scores are an indicator of personal responsibility, in the current climate, he says, “Blaming the victim is factually incorrect.”
What Are Insurance Scores?
A credit-based insurance score is a number, which represents the “relative insurance claim risk based on consumer credit details,” according to John Wilson, director of analytics for Lexis-Nexis. A consumer’s insurance score may differ from a credit score, based on the weight and use of different factors, but both rely on a consumer’s ability to pay bills on time.
The logic, according to Lamont Boyd of Fair Issac and Co., is that people who manage their finances well are also more prudent in other areas of their lives, including driving and caring for a home. But in a time when many consumers’ finances have taken a hit through no fault of their own, this logic falls apart, Birnbaum declared for CarInsuranceCalculator.info.
Birnbaum has protested the use of credit in setting rates for more than a decade. A year ago, when the National Association of Insurance Commissioners took up the issue of using scores in a recession, Birnbaum argued that factors he has long opposed — credit’s disparate effect on minorities, and its unfairness to communities that lack long-term wealth — are only exaggerated in times of high unemployment. In a follow-up presentation in March 2012 to the Casualty Actuarial Society, Birnbaum said the recent strength in insurance markets in California and Massachusetts, where credit bans are in effect, show that “insurance scoring is not needed.”
Wilson
presented data at the same CAS conference to argue that all parts of the country saw an upward trend in scores from 2007 to 2011; thus, he argued, scrapping their use because of the recession makes no sense.
Over the years, regulators have addressed the use of credit information in many ways, with many guided by model legislation from the National Conference of Insurance Legislators (NCOIL). This model requires insurers to file their models and demands that data be updated. While most states allow the use of credit factors in setting premium, the consensus is that credit-based scores cannot be the only factor and that a person’s driving record must carry greater weight. As the recession unfolded, more states embraced the concept of a “life event exemption,” which gives consumers the ability to make a case against being penalized for the death of a bread-winner, a job loss, or a health emergency.
Birnbaum said credit-based scores have had little attention by states over the past year. Michigan passed legislation based the NCOIL model.
How Credit Scoring Changed a Market
A video on the Insurance Information Institute Web site makes the case: “Virtually all insurance companies use credit scoring in some way,” said P.J. Crowley, the trade group’s vice president. Credit-based insurance scores, he
said, allow companies to offer “more insurance at a better price.”
Because insurers overwhelmingly embrace insurance scoring – estimates of 92 percent were reported by CEJ (PDF) – outright bans can
keep insurers out of markets completely. A decade ago, New Jersey’s auto insurance market was the worst in the country; consumers whose policies were not renewed often needed the entire 60-day notice period to find new coverage.
There was no explicit ban on credit in New Jersey, but state regulators had never approved it. In June 2003, on the heels of regulatory reform legislation, New Jersey allowed Mercury General to use credit-scoring on a test basis. After an initial press uproar, regulators plowed ahead, and a year later they admitted GEICO after a 30-year absence.
GEICO’s arrival brought stiff competition among insurers and transformed the market. For the first time in years, insurers began advertising to attract customers. Yet the change also prompted a relatively small company, a reciprocal called New Jersey CURE, to position itself as the “fair” company among its competitors, promising “no credit checks.” Today, CURE’s blue “spokes dot” dominates billboards in this commuter state, and the company’s Web site tells drivers that the other carriers set premium with “discriminatory factors like your credit score, your education level, the type of job you have and whether or not you own or rent your home,” and calls the use of credit “an injustice.” While the blue dot rankles some competitors, auto insurance is no longer the focus of political campaigns.
The bottom line? If you have bad credit, you can find companies that will not penalize you, but you must shop around. Cleaning up a credit rating may make more sense, since it’s probably harming you in other ways. As Susan Grant of the National Consumer League says in the Insurance Institute piece, “Credit ratings are a fact of your financial life.”
