Credit Scoring on Trial in Maryland Auto Insurance Debate

Credit cardsFor at least the past decade, insurance companies and consumer groups have been at odds over the ethics of using of a person’s credit history to help set rates for the price of coverage.

Members of the industry generally support the analysis of a person’s credit to help set rates—a practice known as insurance scoring—saying the statistics show that credit status is a reliable predictor of risk that helps insurers price policies more accurately.

But many consumer groups say that the practice is unfairly discriminatory, with the highest rates being levied on the individuals least able to pay them and with certain ethnic groups having restricted access to the most affordable car insurance prices.

The debate has been renewed this legislative session with bills being introduced to Maryland’s and at least seven other states’ legislatures that would affect the way insurers use this controversial factor.

Maryland’s bill would flat-out prohibit auto insurers from rating drivers differently based on their credit history. Currently, Maryland auto insurers are restricted to using credit in the rating process only during the initial issuance of a policy; they cannot raise rates if a policyholder’s credit declines during the course of a policy period.

But a person’s credit can have a wide effect on the amount they pay initially in Maryland premiums. A positive or negative credit score can lead to a policyholder’s paying 40 percent more or 40 percent less for coverage.

At a recent hearing for the bill in the Maryland House, one representative asked an important question: How does a person’s credit affect their ability to drive?

It’s a question that doesn’t have a clear answer. Numerous state insurance departments and even the Federal Trade Commission (FTC) have tried to find a viable explanation, but all have come up inconclusive. The FTC found that credit scores do correlate closely with the rate and size of claims filed, but it was unable to give a definitive reason as to why this was.

The FTC noted in its extensive 2007 report on the subject that credit scores “are predictive of the number of claims consumers file and the total cost of those claims. The use of scores is therefore likely to make the price of insurance better match the risk of loss posed by the consumer.”

In the end, though, the extensive FTC report  gave credence to both sides of the debate. It showed that credit history made insurers more able to accurately predict risk and price policies. But it also indicated that the reason for this is unclear and that African-Americans and Hispanics end up being considered higher risks as a consequence of credit scoring.

According to the report, the use of  scoring in the sample group caused the average predicted risk of African-Americans to increase by 10 percent and the average for Hispanics to increase by 4.2 percent. On the other hand, the predicted risk decreased by 1.6 percent for non-Hispanic whites and about 5 percent for Asians.

“These changes in predicted risk are likely to have an effect on the insurance premiums that these groups on average pay,” the FTC wrote.

“If you represent Baltimore City or Prince George’s County, it’s no secret that the insurance rates there are astronomical,” said Rep. Jil Carter, who proposed the bill,  “and they are higher in, mostly, the poorer ZIP codes.”

Carter said at the hearing that even if the practice is not discriminatory in its intent, it is discriminatory in practice and should be stopped. She introduced a similar bill last year, though, that ultimately died.

Members of the Property Casualty Insurers Association of America (PCI) testified at the hearing in opposition of the bill. PCI representatives said the legislature went far enough when it passed restrictions in 2002 that barred the use of credit in scoring homeowners and established restrictions when scoring auto owners.

“We think that anything further would be a detriment to consumers,” said Richard Stokes, counsel and regional manager for the PCI.

According to the Insurance Information Institute, at least 27 bills were introduced to state legislatures last year with the intention of curtailing the use of credit scores in pricing coverage.

The FTC’s evaluation of insurance-scoring models showed that coverage providers tended to look at performance on credit obligations, the opening of new accounts, use of credit and the type of credit used.


About Ben Zitney
Benjamin Zitney has been covering the auto insurance industry for the past 2.5 years. Before coming to Online Auto Insurance News, he produced an extensive company history of the 30-year-old California Joint Powers Insurance Authority and worked at the Cal State Long Beach Daily Forty-Niner as a reporter, copy editor and news editor.

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