U.S. House Subcommittee on Oversight and Investigations–Credit-Based Insurance Scores: Are They Fair

On Tuesday, October 2, 2007, the U.S. House Subcommittee on Oversight and Investigations held a hearing entitled “Credit-Based Insurance Scores: Are They Fair” to consider the implications of the growing use of credit-based insurance scores for consumers. 

Specifically, the hearing reviewed a Federal Trade Commission (“FTC”) report to Congress entitled, “Credit-Based Insurance Scores:  Impacts on Consumers of Automobile Insurance” and examine its key findings.  The hearing studied the efforts underway by the States to regulate the use of credit-based insurance scores.

“The FTC report raises serious concerns about the impact of the growing use of credit-based insurance scores that demonstrate a proxy effect for minorities.  I have, therefore, quickly scheduled a hearing this week to review the report, including discussion of the limitations of the research methodology that was used for the report,” said U.S. Representative Melvin L. Watt (D-NC), Chairman of the Subcommittee on Oversight and Investigations.

“The FTC report confirms some of our initial concerns about the fairness of credit-based insurance scoring when it comes to Latinos and African-Americans.  But I am pleased that Oversight Subcommittee Chairman Watt will hold a hearing on the issue and look forward to learning more details about the study,” said Congressman Luis Gutierrez (D-IL).
 

Click on a name to view the prepared testimony of each witness below:

The Honorable J. Thomas Rosch, Commissioner, Federal Trade Commission
The Honorable J. P. Schmidt, Commissioner of Insurance, State of Hawaii
The Honorable Mike Kreidler, Commissioner of Insurance, State of Washington
Mr. Birny Birnbaum, Executive Director, Center for Economic Justice
Mr. Eric Rodriguez, Deputy Vice President, National Council of LaRaza
Mr. Nathaniel Shapo, Partner, Katten Muchin Rosenman LLP

Available Member Statements: Chairman Watt

Click Here to View Archived Webcast

News coverage of the hearing from National Undewriter Magazine On-Line is below:

House Panel Doubts Credit Score Accuracy
BY MATT BRADY
NU Online News Service, Oct. 3, 9:30 a.m. EDT

WASHINGTON —The reliability and appropriateness of using credit scores to rate insurance customers came under fire by a House Committee yesterday.

Questions about the process by members of a House Financial Services Subcommittee followed a Federal Trade Commission Report that found credit scores to be an accurate predictor of loss risk for auto insurance, but also potentially discriminatory.

“Our objective is to shed light on the growing, but often hidden, use of credit information in the pricing and underwriting of insurance and to start analyzing, discussing and determining whether that is fair or whether it even makes sense,” said Rep. Mel Watt, D-N.C., the chairman of the Financial Services Subcommittee on Oversight and Investigations.

Rep. Watt noted that consumer groups have questioned the FTC’s methodology in crafting its report, noting that it was compiled only from information volunteered by insurance companies or available publicly.

It has also been suggested that the finding concerning a discriminatory effect might be more severe if the commission were able to look at more complete data. Additionally, Mr. Watt noted one of the FTC commissioners had dissented from the report.

J. Thomas Rosch, a commissioner with the FTC, defended the report’s findings, noting that its conclusions were supported by a similar study done by the Texas Department of Insurance, “whose methodology was what critics said should have been used by the commission.”

In fact, Mr. Rosch noted, the information regarding ethnicity was not collected from insurers, who do not maintain records of that information, but from the Social Security Administration, the Census Bureau, and a firm that screens for Hispanic surnames.

Rep. Watt, along with full Financial Services Committee Chairman Barney Frank, D-Mass., and Rep. Luis Gutierrez, D-Ill., had written a letter to the FTC requesting that it use its authority to compel insurers to provide data as the commission conducts its next study examining the use of credit scores in homeowners insurance. Mr. Rosch said that the FTC intends to do so.

However, Rep. Watt noted that the FTC has said compelling insurers to provide data would extend the time needed to complete their study by two to three years, and wondered if the added time would produce a report that would be perceived by critics as any more reliable than the report on auto lines.

Birny Birnbaum, executive director of the Center for Economic Justice, questioned both the methodology of the study as “fundamentally flawed” and the premise of insurance scores being predictive of loss.

As an example, he noted that insurance scores can be manipulated by consumers looking to improve their credit scores. “How can that be an effective rating factor when you can manipulate your score?” he asked.

Rep. Watt said his concern was what he called the “common sense” question of “if I get my credit score up, would it make me a better driver?” Additionally, he wondered if the report’s finding that low income and minority consumers are negatively affected by credit scoring means that those consumers are somehow worse drivers.

Rep. Maxine Waters, D-Calif., expressed significant concern over the potentially discriminatory impact of insurance scores.

Mr. Rosch had argued throughout the hearing that the report simply noted the potential impact and was intended simply to inform policymakers who could respond to it, but Rep. Waters argued that recent material crafted by the FTC aimed at helping minorities raise their credit scores to obtain better insurance rates was a tacit acceptance of the discrimination.

“You do take a position, in the way that you decided to handle your so-called consumer education,” she said.

Mr. Rosch responded that “we are not in a position to say whether that is right or wrong, because that is a policy decision to be made by the states.”

One of the panel members, ranking minority member Gary Miller, R-Calif., defended the use of credit scores, noting that several reports have found them to be a significantly useful tool for gauging risk, adding that he didn’t see the need to determine why.

“The question was asked, and you based your answer on all the available data that existed,” he said, adding “I don’t know why gravity’s there either, but it is.”

On the issue of the states, Rep. Watt said in his opening remarks that he supported the work being done in states on credit scoring issues, and the role of states in regulating insurance.

“States have historically regulated and controlled insurance and have historically been the so-called ‘legislative and regulatory laboratories for innovation,’” he said. “State insurance regulators are the best equipped to regulate insurance credit scoring and should continue to do so.”