U.S. House Subcommittee Credit-Based Scoring Hearing Report

May 27, 2008

On Wednesday, May 21, 2008, the United States House of Representatives Financial Services Committee Subcommittee on Oversight and Investigations (“Subcommittee”) held a hearing entitled “The Impact of Credit-Based Insurance Scoring on the Availability and Affordability of Insurance.”

The hearing, the second of two on the subject requested by Subcommittee Chairman U.S. Representative Melvin L. Watt (D-NC), reviewed the consumer impact of credit-based insurance scoring and recently-introduced related legislation:

HR 5633, also known as “The Nondiscriminatory Use of Consumer Reports and Consumer Information Act of 2008,” is sponsored by Representative Luis Gutierrez (D-IL) and co-sponsored by Representatives Watt and House Financial Services Committee Chairman Barney Frank (D-MA). The bill amends the Fair Credit Reporting Act in order to prohibit certain discriminatory uses of consumer reports and information connected with certain personal lines of insurance, among other provisions.

HR 6062, also known as the “Personal Lines of Insurance Fairness Act of 2008,” is sponsored by Representative Maxine Waters (D-CA) and co-sponsored by Representatives Frank, Watt and Gutierrez. Among other provisions, the bill amends the Fair Credit Reporting Act to prohibit the use of consumer reports and consumer information in making any determination involving personal lines insurance consumers.

Representative Watt opened the hearing by expressing his concern regarding whether the use of credit-based insurance scoring has the potential for racial or ethnic discrimination by proxy. To view a copy of Representative Watt’s opening remarks, click here.

Before the panel discussion was opened, Subcommittee members stated their individual positions regarding credit-based insurance scoring.

Chairman Watt and Representatives Gutierrez, Waters, and Al Green (D-TX) gave statements against the use of credit-based scoring and cited the following concerns:

  • Racial discrimination by proxy
  • The validity of using credit-based scoring is based on a correlative, rather than causal connection
  • A seeming disadvantage toward young drivers, senior citizens, recent immigrants, low-income earners, applicants who have had a sudden financial hardship, or anyone else with low or no credit
  • Unclear connectivity between credit score and driver safety

Representative Green cautioned “…if we aren’t careful, we are going to make it impossible to be poor in the richest country in the world.”

Representatives Brad Miller (D-NC), Edward Royce (D-CA), Peter Roskam (R-IL), and Patrick McHenry (R-NC), spoke in favor of credit-based scoring. They expressed their opinions that credit-based scoring allows:

  • Fairer and lower insurance rates because insurers can better identify risk
  • Increases availability of low-cost insurance, especially for those with more risk or imperfect driving records
  • Increased competition among insurance companies, which provides incentive to keep rates low
  • Causal relationship between factors like good credit, high student grades and good driving because of a lower instance of risk-taking behaviors

Representative Miller pointed out that race, ethnicity, gender and income level are not used in setting rates, nor is that type of information available from a credit score.

Panel One speakers included (click on the panelist’s name to view his or her written testimony):

  • Lydia B. Parnes, Director, Bureau of Consumer Protection, Federal Trade Commission (“FTC”)
  • The Honorable Kevin McCarty, Insurance Commissioner, State of Florida, on behalf of the National Association of Insurance Commissioners (“NAIC”)
  • The Honorable George J. Keiser, Representative, State of North Dakota, on behalf of the National Conference of Insurance Legislators (“NCOIL”)

Ms. Parnes provided an update regarding an ongoing FTC study on the use of credit-based scoring in the homeowners insurance market. In order to gain further information for the study’s completion, the FTC will issue subpoenas to the nation’s nine largest homeowners insurers. For 30 days prior to issuing the subpoenas, the FTC will solicit public comment on the type of information that should be subpoenaed. An FTC draft model order detailing the type of information to be subpoenaed may be viewed by clicking here.

Although Ms. Parnes described the homeowners insurance industry as having been cooperative in providing information to date, she added that public perception of the validity of the information provided heretofore dictates that it be gathered under subpoena. As an example, a similar study was conducted on the automobile insurance industry. The validity of this study, which was conducted without subpoena, was questioned because of expressed perceptions that data given willingly by insurance companies was not credible.

To view a copy of the July 2007 Report to Congress on this study by the FTC, entitled “Credit-Based Insurance Scores: Impacts on Consumers of Automobile Insurance,” click here.

Ms. Parnes also stated that the FTC has taken no official position on the use of credit-based scoring in either the homeowners or automobile insurance market.

Commissioner McCarty spoke against the use of credit-based scoring and stated his support of both U.S. House bills, as well as the new FTC study. He also cited the following personal opinions on why credit-scoring is unreliable:

  • Fifty percent of credit reports include errors
  • Credit reports disproportionately score people who have recently undergone a financial crisis such as a divorce, death of a spouse or close family member; recently naturalized citizens; the elderly; the young; and religious factions that do not believe in credit.
  • Regarding the relationship between credit scores and race/ethnicity/socio-economic status, Commissioner McCarty stated that the average credit score of African-Americans is 10 percent lower than that of Caucasians.

Commissioner McCarty also stated that he is troubled by the use of occupational and educational markers to determine insurance rates. He opined that higher income policyholders are much more likely to have a higher deductible and pay out-of-pocket for property damage instead of filing a claim.

Representative Keiser spoke in favor of using credit-based scoring in determining insurance rates and said that the practice offers a consistent way to evaluate risk. He related that after conducting studies regarding the impact of credit-based scoring, NCOIL has adopted a model determined to be equitable among various demographic segments. The NCOIL model treats “thin” credit as neutral or positive, so as to not weigh too heavily the scores of those people new to the credit market, and allows for a one-time credit pass due to extraordinary circumstances (like a death in the family, divorce or heath crisis). To date, 26 states have adopted the NCOIL model, which is flexible to meet needs on a state-by-state basis. It is NCOIL’s position that because this model has been developed, no new legislation is necessary, and that if such duplicative legislation is enacted, insurance rates could rise.

Representative Keiser stated that NCOIL is concerned with protecting the use of valid insurance risk markers such as good academic grades, family health history for health insurance.

Panel Two speakers included (click on the panelist’s name to view his or her written testimony):

Mr. Hunter spoke against the use of credit-based scoring for the following reasons:

  • The insurance industry’s use of credit-based scoring is based on correlation instead of fact
  • Credit-based scoring violates actuarial principles
  • Credit-based scoring is a proxy for race/income discrimination

To illustrate the use of good rate-setting practices, Mr. Hunter cited the banning of credit-based scoring in California. According to studies, California has the fourth most competitive insurance industry in America. Mr. Hunter and the Consumer Federation of America enthusiastically support HR 6062, but fear that HR 5633 does not go far enough to accomplish its goals as it is currently written.

Citing racial and income discrimination as the primary reason for her opposition, Ms. Rice spoke against the use of credit-based scoring. Saying that African-Americans and members of other low-income groups are not biologically more likely to engage in risk-taking behaviors, Ms. Rice concluded that they should not automatically be charged a higher insurance rate. Ms. Rice and the National Fair Housing Alliance support HR 6062 with no reservations, but are unsure of whether HR 5633 does enough to combat discrimination.

Mr. Poe testified against the use of credit-based scoring. He related that while his company currently does not use this method in determining rates, it may have to begin doing so, due to the pressure of increased rate competition. Saying that income, not credit score, is correlated to loss ratios, Mr. Poe continued by stating that the industry supports credit-based scoring because this method garners higher revenues, is an effective method of data mining, and those with higher incomes are less likely to file a claim.

Mr. Neeson spoke in favor of using credit-based scoring for the following reasons:

  • Credit-based scoring is an objective method of calculating risk
  • The practice encourages a very competitive industry
  • Credit-based scoring improves pricing accuracy, especially when used in conjunction with other models, such as vehicle age, driver age, gender, and driving history

According to a survey done in Arkansas, 92 percent of automobile policyholders and 90.8 percent of homeowners insurance customers have received either a discount, or no impact in rates due to credit-based scoring.

Mr. Neeson also stated that many insurers could be less aggressive in pursuing new business if the aforementioned bills were passed. Instead of a federal mandate, he is in favor of using the NCOIL or other restrictive, state-based model.

Mr. Pratt spoke in favor of credit-based scoring, saying it is fair and predictive. He feels that states fulfill their role in protecting consumers, and therefore no federal legislation is needed.

Dr. Powell spoke in favor of credit-based scoring, saying that it is an appropriate method of scoring that creates value and promotes fairness. He added that credit-based scoring is a powerful and accurate indicator of insured losses because of the correlation between bad credit and higher risk.

To view a statement regarding the issue from Representative Andre Carson (D-IN), click here.

Following questions from Subcommittee members, the Hearing was adjourned.

Below are links to various news articles that were published following the hearing (click on a headline to view the complete story):

Insurers’ use of credit scores to set rates is challenged in Washington

What does your credit score have to do with what you pay for automobile or homeowner insurance? How about your education or your job?

Credit Score Ban Would Be Disruptive, Congress Told

Five insurance industry trade groups defended carriers’ utilization of credit records to set personal lines insurance rates and warned that barring their use would create major disruptions in the marketplace.

NAIC Testifies on the Use of Credit-Based Insurance Scores

On behalf of the National Association of Insurance Commissioners (NAIC), Florida Insurance Commissioner Kevin McCarty testified before the U.S. House Financial Services Committee’s Subcommittee on Oversight and Investigations hearing titled, “The Impact of Credit-Based Insurance Scoring on the Availability and Affordability of Insurance.”

FTC Testifies Before U.S. House Subcommittee On Progress Of Credit-based Insurance Score Study

The Federal Trade Commission today provided Congress with an update on the progress of its study on the use of credit-based insurance scores in homeowners insurance.

 

Should you have any questions or comments, please do not hesitate to contact this office.

 

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