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 today he is calling for a legislative ban on insurers' use of credit records to rate customers after an insurance department study found that credit scoring hurts low-income and minority policyholders.

At the same time, Missouri Insurance Department Director Scott B. Lakin announced that his state will head a national study of credit scoring that will test whether similar patterns exist in other states.

The Missouri activity reignites the hot-button credit scoring issue for insurers who mounted a heavy campaign last September to get a National Association of Insurance Commissioners panel to drop plans for a study.

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

According to the Missouri Insurance Department, 10 states already have signed up for the project while another 10 have expressed interest in joining the effort, which would further test the Missouri results and explore the dynamics of credit scoring.

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

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

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

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

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

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

Gov. Holden in a statement said: "The concern is that credit scoring is unfairly penalizing low-income citizens with inflated insurance prices, with much of the burden falling on African-Americans and Hispanics with higher insurance prices. This places unnecessary obstacles in the way of many people and many communities that are struggling to move forward."

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

The Missouri Insurance Department, in announcing the study, said minorities and low-income residents have historically have faced significant obstacles in obtaining insurance.

Its report, according to the department, is the first independent study nationally able to draw conclusions on whether credit scoring disproportionately harms these groups, because previously only insurers and credit-scoring companies had access to the data needed to perform the study.

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

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

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

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

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

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

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

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Missouri Study Slams Credit Scoring, Ban Is Asked

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