OIR Public Hearing Report: Use of Credit Reports and Credit Scores by Insurers
Feb 20, 2009
On Wednesday February 18, 2009 the Florida Office of Insurance Regulation (“OIR”) held a public hearing on the use of credit reports by insurers in determining rates/premiums, and, more specifically, whether the use of this information leads to discriminatory pricing against non-white and non-Asian minorities.
OIR General Counsel Steve Parton presided over the hearing, along with OIR Actuary Howard Eaglefeld and Florida Insurance Consumer Advocate, Shawn Shaw.
Five insurance companies – Allstate, GEICO, Nationwide, Progressive and State Farm had been sent subpoenas requesting that corporate representatives of each company who are most knowledgeable of the above issues attend the public hearing and be prepared to testify on behalf of their respective companies.
Specific issues subject to testimony included:
1. The use of credit scoring models and credit information in underwriting and determination of rates
2. Response to federal and state studies that have determined that the use of credit scores and models have a disparate impact on certain classes of people
3. Actions taken by insurers to address these concerns
4. Positive and negative effects that credit scoring has had on the consumer
5. Efforts taken to ameliorate or reduce discrimination based on income or race
6. Detailed explanation of how credit scoring is used by the insurer
7. Impact if the use of credit scoring or credit information was prohibited
Documents and records that are the subject of the subpoenas were to be produced on, or before, the date of the hearing.
Testimony was given by representatives from various insurance companies, who also answered questions in defense of their companies’ use of credit reports to predict risk and formulate rates/premiums for individual automobile insurance policies.
At the outset of the hearing, prepared statements were read by consumer advocates, as well as by politicians in attendance. Senator Ronda Storms (R) expressed her opinion that “we need to make sure that people who are hard workers aren’t harmed by the use of credit reports.” She added that “credit scores don’t have any impact on a person’s driving ability.”
A similar sentiment was shared by Representative Priscilla Taylor (D), who asked how having a low credit score can make a person more likely to have an accident. Representative Taylor added that a disproportionate amount of people with bad credit are minorities who are negatively affected by the use of this data.
In addition to the legislators’ remarks, testimony by a National Association of Insurance Commissioners (“NAIC”) representative set the tone for the remainder of the hearing. The NAIC representative reported that credit scores are not an objective standard for insurers to use because they are formulated in a subjective way and can fluctuate over a very short period of time. He pointed out that three different credit scoring companies use different data when scoring, and concluded that insurers should therefore be required to use all three. This remark prompted Mr. Shaw to ask “if credit scores are so arbitrary, why do banks use them for loans?” The NAIC representative responded “they place more weight on payment history.”
The NAIC representative also expressed the opinion that credit data is not always complete and can be manipulated, adding that behavior of lenders can affect scores just as much as the behavior of consumers. Additionally, he stated that, although the industry says there is a statistical relationship between credit scores and frequency of loss, relying on this correlation is problematic because while insurers can use models to predict almost anything, credit is rarely an accurate factor in doing so.
In addressing the issue of discrimination, the NAIC representative stated that the types of factors used to evaluate credit scores are related to income and race, and that there is a disproportionate percentage of low income consumers who are late on loan payments. Credit scoring uses income and race indirectly in ratemaking, which accounts for one reason why Hawaii and California have banned the practice.
Before the insurer representatives testified, AARP Assistant State Director Charles Milstead offered a different perspective on the issue of discrimination by indicating that people without a lot of recent credit history, such as senior citizens, also may be negatively affected by the use of credit data. Stating that “credit scoring is detrimental to seniors,” he explained that seniors do not rely as heavily on credit, and therefore, even if they pose no more risk than someone with a good credit score, they may have to pay a higher premium for their insurance.
It was noted that the industry jargon for people with little or no credit history, driving violations or claims is a “thin file.”
In connection with its inquiry, the OIR relied heavily on a recent report by the Federal Trade Commission (“FTC”) that highlighted distributional inequities in the way credit scoring affects aggregate rates assigned to minorities. The report found that, although rates are evenly assigned to whites and Asians, those assigned to non-white and non-Asian minorities are less advantageous.
To view the FTC report, click here.
The OIR asked all of the subpoenaed insurers to address the findings of the FTC report by explaining how the use of credit scoring is not discriminatory if, indeed, these findings are accurate, and why the practice should not be prohibited. The OIR also questioned the insurers on how they use credit scoring in their models and ratemaking process, what credit data they use, and what credit service(s) they utilize.
All of the insurers testified that, although the findings of the FTC report showed a disproportionate amount of non-Asian minorities in the disadvantageous ranges, this did not mean that the use of credit scoring was discriminatory, since other sections of the report clearly showed that there were geographical/territorial, and perhaps even cultural reasons why these numbers appear the way they do.
From the insurers’ point of view, the report statistics are really a manifestation of a socio-economic issue that affects all races. As evidence of that point, most of the insurers maintained that, as applied to race and income, credit scores were evenly distributed, even though geographic statistics indicated that this was not the case.
All of the insurers who testified pointed out that they cannot possibly be acting in a discriminatory manner, since they do not collect data on race or ethnicity (nor do they want to) and that they would not even know how to factor that information into their ratemaking processes. In response to a similar comment made by a Nationwide representative, Mr. Parton suggested that perhaps the companies should collect information on race in order to ensure against discrimination. Nationwide’s representative indicated the company did not favor this suggestion.
The insurers seemed to share the opinion that the correlation between credit scores and actual risk of loss is very high, and that despite what the NAIC representative found, their own internal studies have concluded that the correlation was strong.
Most notably, the insurers reported that because credit scoring is such a good predictor of risk, it allows insurers to more accurately and efficiently price individual risks. Therefore, its elimination would negatively impact many more consumers than it would help the lower risk consumers, who then would, essentially, subsidize those higher risk consumers.
Except for State Farm, all of the insurers reported that between 50-60 percent of their Florida customers would experience a rate increase if credit scoring is banned in Florida. The discrepancies among insurers’ projections are due to the way each factored credit scores in their proprietary models. The insurers indicated that Florida’s residual auto market is very small, especially compared with markets such as California and, formerly, New Jersey, where credit scoring/rating was banned. A representative from Progressive indicated that one of the main reasons why the company reentered the New Jersey market was because that state’s credit scoring ban was lifted.
Regarding discrimination against seniors and other consumers having “thin files,” all of the companies offered varying degrees of detail on their modeling and handling of these types of customers. A GEICO representative reported that “thin file” customers make up as much as 20 percent of the company’s Florida business.
In general, the insurers maintained that their companies make the best effort not to discriminate against those with little credit history and treat them either neutrally or favorably in the ratemaking process.
Additional information:
This is a brief summary of the discussion and events that took place during the referenced hearing relating to the use of credit reports by automobile insurers in Florida. It is not intended to be a comprehensive review or analysis of any particular issue. Further, this report should not be relied upon for making any specific decisions. Should you have any questions, please do not hesitate to contact Colodny Fass. This Office will continue to follow this and other issues related to actions taken by the Florida Office of Insurance Regulation and provide information on those issues as they arise.