NU Online News Service

WASHINGTON--A House committee heard rival opinions oninsurers use of consumer credit scoring that was called bothjustified and unfair.

Speaking on behalf of the industry, in an appearance before theSubcommittee on Financial Institutions and Consumer Credit of theHouse Financial Services Committee, David Snyder, AmericanInsurance Association vice president and associate general counsel,defended the use of credit scoring as an appropriate tool inhelping set premiums for personal lines.

At the same time, Chi Chi Wu, representing the National ConsumerLaw Center, Boston, said credit reports suffer from "unacceptablerates of inaccuracy."

And he argued that the practice "creates wide racial disparitiesand is fundamentally unfair to consumers."

But, Michael McRaith, Illinois insurance commissioner, took amiddle ground, noting that over the years, "insurance regulatorshave heard arguments and rhetoric, if not diatribe, on both sidesof this public policy question."

McRaith, testifying on behalf of the National Association ofInsurance Commissioners, said that to deal with this, regulatorsare continuing to examine both sides of the issue.

"Distinct from the public policy debate, regulators arepresently investigating the components of an insurance score, theextent to which any one rating factor affects a consumer, whetherconsumers have an appropriate understanding of the credit factorsthat affect a particular insurance policy, and whether insurancescore vendors should be subject to enhanced transparency orsupervision," McRaith said.

The AIA's Snyder said insurance scoring has contributed tofavorable personal lines markets in several ways. One of these, hesaid, is that it "provides an objective, cost effective riskmeasurement tool for all components of auto insurance coverage,citing a 2003 actuarial study.

Second, he said, "by providing a comparative and quantitativemeasure for each risk, it has allowed insurers to move towardpricing which is much more tailored to individual risk, replacingthe old system that relied exclusively on large groupclassifications, such as geographic territory or age."

He also said that it has encouraged insurers to write morecoverage because "they have more confidence that they are able toaccurately predict and price for all levels of risk."

Anne Fortney, a partner at Hudson Cook LLP, Washington, D.C.,also defended the use of credit scoring.

She argued that if an insurer cannot use credit information as afactor in assessing risk in the case of property or casualtyinsurance, "the insurer's ability to price effectively for riskwill be diminished."

The inevitable result, she said, "will be higher premiums formost consumers and less availability of insurance for marginalinsurance risks."

She also touched on an argument by critics that the datasupports the notion that use of crediting scoring has a higher thanaverage impact on the poor and minorities.

She added that, while each case is different, "it is importantto understand that the existence of a disparate impact on aprotected group would not, standing alone, constitute a violationof the Fair Housing Act or the Equal Credit Opportunity Act."

She explained that, "Once such a disparate impact is proven, theburden shifts to the defendant to show a legitimate business reasonfor the use of a policy or practice that caused the disparateimpact."