Missouri Study Slams Credit Scoring, Ban Is Asked

By Daniel Hays

NU Online News Service, Jan. 29, 4:01 p.m.EST?Missouri Gov. Bob Holden said todayhe is calling for a legislative ban on insurers' use of creditrecords to rate customers after an insurance department study foundthat credit scoring hurts low-income and minoritypolicyholders.

At the same time, Missouri Insurance Department Director ScottB. Lakin announced that his state will head a national study ofcredit scoring that will test whether similar patterns exist inother states.

The Missouri activity reignites the hot-button credit scoringissue for insurers who mounted a heavy campaign last September toget a National Association of Insurance Commissioners panel to dropplans for a study.

Insurer trade groups have argued, in part, that without the useof credit scoring good drivers pay rates that subsidize bad onesand that it is an unbiased predictor of risk.

According to the Missouri Insurance Department, 10 statesalready have signed up for the project while another 10 haveexpressed interest in joining the effort, which would further testthe Missouri results and explore the dynamics of creditscoring.

A spokesman for the Missouri Insurance Department, RandyMcConnell, said the names of the states would probably be madepublic next week. "It's kind of an ad hoc group."

Mr. Holden, a Democrat who is running for reelection, held pressconferences on the credit scoring issue in Kansas City and St.Louis.

Mr. McConnell said Missouri law outlaws use of credit scoring asa sole factor in underwriting. He said the governor is seeking atotal ban on its use both in underwriting and rating.

The department said its study used data from 12 auto andhomeowners insurers that made credit scoring a significant part oftheir underwriting and rating between 1999 and 2001 for 333,522drivers. Insurers in the study included Allstate, Farmers,Progressive and State Farm, among others.

According to the department, both urban and rural Missourianssuffer because residents of Missouri's lowest-income areas?often inthe inner cities and in the southern part of the state?had averagecredit scores 12.8 points lower than the wealthiest ZIP codes.

The department said low credit scores for minority ZIP codeshold true "even if individual residents have the same income level,marital status, unemployment status, or education level asresidents of predominantly white neighborhoods."

Gov. Holden in a statement said: "The concern is that creditscoring is unfairly penalizing low-income citizens with inflatedinsurance prices, with much of the burden falling onAfrican-Americans and Hispanics with higher insurance prices. Thisplaces unnecessary obstacles in the way of many people and manycommunities that are struggling to move forward."

At his St. Louis news conference, he said the state's Assemblyneeds to understand that "credit scoring can make it unusuallydifficult for minorities and low-income Missourians statewide toprotect their homes and vehicles."

The Missouri Insurance Department, in announcing the study, saidminorities and low-income residents have historically have facedsignificant obstacles in obtaining insurance.

Its report, according to the department, is the firstindependent study nationally able to draw conclusions on whethercredit scoring disproportionately harms these groups, becausepreviously only insurers and credit-scoring companies had access tothe data needed to perform the study.

According to the department, it has heard from industry groupsthat some insurance companies penalize poor credit scores withrates as much as 50 percent higher, and policyholders can benefitby as much as 20 percent on their rates with good creditscores.

Mr. Holden expressed concerns about credit scoring techniques,indicating that they are secretive and not well understood by thepublic, and they may not be an accurate indicator of a person'sfinancial responsibility.

Attorney Nat Shapo, a former Illinois insurance director,speaking for a number of insurance trade groups, told the NAIC inSeptember that any disparate impact study of credit scoring would"represent a fundamental shift away from the classic legalunderstanding of ?unfair discrimination' as embodied in state lawsacross the country and as interpreted repeatedly by the courts" andthe NAIC.

Besides Missouri, the issue of credit scoring has been understudy in Texas, where a study is due next year.

Missouri regulators said use of credit scoring expanded greatlyin the late 1990s, with more than 90 percent of auto insurers andmost homeowners carriers adopting credit scoring to determinewhether to insure an applicant and how much to charge.

Consumer and minority groups have objected to the practice asdiscriminatory and as an inaccurate predictor.

Brent Kabler, the MDI statistics chief, conducted the Missouristudy, which is posted on the MDI Website, www.insurance.mo.gov. The Website also has information showing how Missouri's largest auto andhome insurers use credit scoring.