New research from the Consumer Federation of America shows thatthe nation's two largest auto insurers, State Farm and Allstate,charge lower- and moderate-income drivers with poor credit scoresmuch higher premiums than drivers with excellent scores, even assurveys that show a majority of Americans are against the use ofcredit scores for the pricing of insurance policies.

The CFA released its latest report, “The Use of Credit Scores byAuto Insurers: Adverse Impacts on Low- and Moderate-Income Drivers”yesterday at a live teleconference.

However, insurance experts say this announcement is nothing morethan old news, minus a well-researched decision that credit scoringis a proven significant factor in determining which drivers mayfile a claim.

According to the CFA, a case study based on a driver who is asingle woman with a clean driving record and no accidents, who isliving in a moderate-income Zip Code in 10 major cities, and whopurchases the minimum liability required by her state, faces anaverage 100% difference in premium costs depending on her creditscore: that's about $563 vs. $1,277. The differences are greaterfor State Farm policies than Allstate; State Farm prices also tendto be lower than Allstate, the report states.

“That's a significant price difference for this driver as aresult of her credit score,” says CFA Executive Director StephenBrobeck. “Good, safe drivers in moderate-income areas are oftencharged more than other drivers from higher-income areas. Thehigher one's income, the higher one's credit score. But the abilityto pay insurance premiums is not a factor here.”

Additionally, most Americans—more than two-thirds of thosesurveyed—feel that someone who's had difficulty paying debts shouldnot automatically be charged higher auto insurance premiums,according to a 2012 survey by ORC International, in which 47% ofrespondents said it is “very unfair” and 20% said it is “unfair”for insurers to use credit scores in deciding an auto-insurancerate for a driver.

“We agree with a large majority of Americans that auto insuranceshould not be allowed to discriminate against low-income drivers,”Brobeck says. He adds that earlier CFA research has shown that mostlow-income households need a car, and pay more than $1,000 inannual premiums for necessary auto insurance, which causes higherauto insurance prices for drivers with less education andlower-status jobs.

In all states but New Hampshire, drivers are required topurchase liability insurance.

“There was nothing new in this press conference,” says InsuranceInformation Institute President Robert Hartwig. What was left out,however, is that credit scores are “highly correlated with expectedloss” in both auto and homeowner's insurance, he says.

“And that correlation exists and has been determined in a waythat is absolutely blind to income, race, and ethnicity, and that'sbecause credit scores contain absolutely no information aboutincome or other socio-economic or demographic factors,” Hartwigsays. “They are entirely blind; it is absolutely the case.”

Such CFA reports tend to focus on urban areas, where the cost ofinsurance is higher than rural or suburban areas due to a higherfrequency of accidents, a higher cost of accidents, and a higherfrequency of litigation following an accident, Hartwigadds.

“Insurers have been using credit scoring for nearly two decades.Its use has been determined and accepted in 47 states,” Hartwigsays. He contends the actual debate about credit scoring and itslink to a greater number of accidents was settled decades ago, withmany studies done in the late 1990s and early 2000s. “Why bring itup?”

The CFA looks at its findings as an opportunity to drawattention to credit scoring, and would like the 47 states that douse credit scoring to “follow the lead” of Hawaii, California andMassachusetts, which prohibit the use of auto-insurance rates basedon credit, says CFA Director of Insurance J. Robert Hunter, whoco-chaired the December 11 teleconference with Brobeck.

The use of credit scoring is unfair to the low-income workingdrivers “who struggle to survive financially partly because theirauto insurance premiums are so high,” as auto insurance premiumscan cost as much as 10% of a low-income client's disposable income,he adds.

“It makes worse other factors that drive up costs for low-incomeAmericans,” Hunter says. “It is unfair and actuariallyunsound.”

Hartwig, though, says, “If you were to ban the use of thiscredit information in underwriting criteria you would wind up, ineffect, subsidizing individuals who cause a great cost on thesystem through a greater number of accidents.”

Robert Detlefsen, vice president, Public Policy for the NationalAssociation of Mutual Insurance Companies, agreed with Hartwig thatthe CFA's release lacked the full story, neglecting to mention theeffectiveness of using credit scores in assessing the likelihoodthat a driver will file a claim. “The Federal Trade Commission,whose report is cited in CFA's own report, states that'credit-based insurance scores are effective predictors of riskunder automobile policies. They are predictive of the number ofclaims consumers file and the total cost of those claims,'”Detlefsen said in a released statement.

“If CFA understood the concept of adverse selection, it wouldknow that if an insurer deliberately charged higher prices forlow-risk consumers than for high-risk consumers, it would quicklybecome insolvent,” Detlefsen stated.