Study supports credit score, insurance link

August 2, 2007


Using credit scores as a factor in determining automobile insurance eligibility and premiums is a standard industry practice. For years, insurers have maintained that a person's scores, originally intended to measure creditworthiness, also are a predictor of whether - and how often - someone will file an auto insurance claim.

And for years, consumer groups have urged state legislatures and the federal government to see the flaws in that practice.

Consumer advocates say using credit scores to set insurance rates unfairly hurts blacks and Hispanics because those groups tend to have lower credit scores and thus end up paying more for their auto insurance. They also complain that errors in credit files can result in lower scores and thus higher insurance premiums.

The Federal Trade Commission recently weighed in on the debate, releasing a study that largely sides with the industry.

The Fair and Accurate Credit Transactions Act of 2003 charged the FTC with investigating the use of credit scores in setting auto insurance rates. Among other things, the FTC was asked to determine the effect of credit-based insurance scoring on certain groups of consumers, such as low-income and minority consumers.

Insurance companies began to use scoring in the mid-1990s. Today, all major automobile insurance companies use the credit-based scores in some capacity, according to the FTC report.

The FTC, using prior research, public comments and industry data, concluded that credit scores predict the number of claims consumers file and the total cost of those claims.

The Consumer Federation of America, the National Fair Housing Alliance, the National Consumer Law Center and the Center for Economic Justice issued a joint statement criticizing the FTC's methodology.

"The FTC's approach to collecting data for the analysis is like the federal government trying to do a study on the health impacts of tobacco use with data selected by tobacco companies for the study," said Allen Fishbein, of the Consumer Federation of America.

One of the five FTC commissioners, Pamela Jones Harbour, also took issue with the agency's findings.

"I distrust the integrity of the underlying data set upon which the study was based," Harbour said.

Commissioner Jon Leibowitz, who voted to release the report, said that although the analysis appears to find insurance scoring did predict the risk of insurance claims, "the differences in credit-based insurance scores across racial and ethnic groups are a disturbing reminder that our society is - still - not race blind, and that vestiges of our history of discrimination remain ever-present."

The insurance industry, however, was pleased with the FTC report.

"We believe scores reduce subsidization of bad risks by good ones, meaning most consumers pay less for insurance," said David Snyder, vice president and assistant general counsel for the American Insurance Association.

Certainly consumers should practice good financial habits such as paying their bills on time and limiting their use of credit. But should someone pay more for auto insurance because he or she lost a job and couldn't pay his or her credit card bill?

"Insurance premiums should be based on the risk of an accident, not a consumer's bill-paying record for other goods and services," said Norma Garcia, a staff attorney for Consumers Union.

After assessing all the research and the data from the industry and after hearing 200 comments from the public, the FTC still couldn't determine why there is correlation between low credit scores and the increased likelihood that someone will file an auto insurance claim.

If you don't know why, then how do you know the practice is fair and unbiased?

FTC commissioner Harbour said the agency failed to provide a more "balanced discussion of the benefits and detriments of using credit scores and credit-based insurance scores."

On that point, I concur.

- Michelle Singletary is a columnist for The Washington Post.


bige1030 10 years, 10 months ago

What's the point of even having insurance with tons of risk categories and models? Soon enough, with all of this risk modeling, insurance won't even financially benefit anyone, and you might as well put what you would have paid in insurance premiums into a savings account to use just like insurance. If properly invested, you'd probably fund all of your claims and have some left over for retirement!

Of course, the law and secured creditors require people to insure their property to some extent, so they keep on adding the fuel to the sham racket that insurance is becoming.

bige1030 10 years, 10 months ago

  • I meant investment fund, not your own savings account. Perhaps an online-only savings account will get you a high enough yield to be worth your while, but properly selected investments could leave you better off than even an online savings account.

just_another_bozo_on_this_bus 10 years, 10 months ago

"The insurance industry, however, was pleased with the FTC report."

And I'm sure they are pleased with the results of their campaign contributions to BushCo that paved the way for this report.

kujeeper 10 years, 10 months ago

I think this is great. I have good credit and good money management, so I do make less claims. I worked in insurance in Lawrence for about three years and I think it is a true claim. I worked hourly so it made no difference to me what the insurance company did or profited, but when credit scoring was inacted it was very true. The clients that saw an increase due to poor credit were the same ones who carried $100 or $250 deductibles and would want to make a $300 claim every six months or so. They couldn't manage their money or lived beyond their means so they had no savings to cover them backing into a pole. They don't get the fact that many claims over a period of time will hurt you and raise your rates. This whole race card playing is getting worn out.

lunacydetector 10 years, 10 months ago

more revolving debt as an excuse to have lower insurance premiums? this is a horrible way of educating our youth that it's okay to go into debt.

lunacydetector 10 years, 10 months ago

...and don't forget it is the insurance industry that brought millions of people: the 'whole life' insurance policy scam, the universal life insurance policy scam, and the variable life insurance policy scam.

Sigmund 10 years, 10 months ago

The poor has always paid more for insurance, food, and gas. The poor drive older cars which are more susceptible to failure and less safe, live in neighborhoods with less police presence and higher crime rates which lead to higher costs for grocers and gas station owners not to mention the risk of theft. The poor are also represent a higher moral hazard (the risk that if insured they will be less motivated to protect their property) and fraud hazard (the risk of filing false claims for financial gain).

The insurance companies are simply requiring those at greater risk to carry their fair share of claims, much like smokers pay higher health insurance premiums. The poor are put into different risk class than the rich because each class pays has a greater likelihood of claims. It is about time that the poor learn to carry their fair share.

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