WASHINGTON–Credit scores are an “effective predictor” of riskunder automobile insurance policies, the Federal Trade Commissionsays in a report, an advance copy of which was obtained by NationalUnderwriter.

Industry trade groups, who also have had an advance look, hailedthe findings, with officials of the National Association of MutualInsurance Companies saying, for example, “that the report confirmswhat the industry has been saying all along–that credit-basedinsurance scores provide an objective and reliable tool” forsetting insurance rates.

Opponents of the technique in the past have argued that itunfairly impacts low-income and minority groups, and fails toaccount for those who deal in cash or are impacted by one-timeevents such as medical emergencies.

But the report says the use of credit-based insurance scores“may result in benefits for consumers.”

“For example, scores permit insurance companies to evaluate riskwith greater accuracy, which may make them more willing to offerinsurance to higher-risk consumers for whom they would otherwisenot be able to determine an appropriate premium,” according to thereport.

“Scores also may make the process of granting and pricinginsurance quicker and cheaper–cost savings that may be passed on toconsumers in the form of lower premiums,” the report adds.

However, the report cautions, “little hard data was submitted oravailable to quantify the magnitude of these benefits toconsumers.”

At the same time, the report does say that credit-basedinsurance scores are distributed differently among racial andethnic groups, and this difference is likely to have an effect onthe insurance premiums that these groups pay, on average.

Specifically, the report says, non-Hispanic whites and Asiansare distributed relatively evenly over the range of scores.

However, African-Americans and Hispanics are substantiallyoverrepresented among consumers with the lowest scores–the scoresassociated with the highest predicted risk–”and substantiallyunderrepresented among those with the highest scores.”

The agency also says that even though it tried a variety ofalternative approaches, “the FTC was not able to develop analternative credit-based insurance scoring model that wouldcontinue to predict risk effectively, yet decrease the differencesin scores on average among racial and ethnic groups.”

The agency adds that this does not mean a model could not beconstructed that meets both of these objectives, “but it doesstrongly suggest, however, that there is no readily availablescoring model that would do so.”

The report says that, in general, credit scores “are predictiveof the number of claims consumers file and the total cost of thoseclaims.”

“The use of scores is therefore likely to make the price ofinsurance better match the risk of loss posed by the consumer,” thereport adds. “Thus, on average, higher-risk consumers will payhigher premiums and lower-risk consumers will pay lowerpremiums.”

Carl Parks, NAMIC's senior vice president of government affairs,said that “the practice encourages competition, enables insurers tooffer coverage to more consumers at a fair price, and helpsstreamline the decision-making process.”

June Holmes, interim CEO for the Property Casualty InsurersAssociation of America, said the report “reaffirms the strongconnection between credit information and the risk of loss, and hasdetermined that its use helps to increase the availability andaffordability of insurance for most consumers.”

Ms. Holmes added, “Now there should be no doubt about the valueof using this highly predictive underwriting and rating tool.”

David Snyder, vice president and assistant general counsel atthe American Insurance Association, said the study “confirms whatwe have long professed, and many previous studies have shown, thatcredit-based insurance scores help refine insurance pricing tobetter reflect an individual's risk profile.”

“We believe scores reduce subsidization of bad risks by goodones, meaning most consumers pay less for insurance,” Mr. Snydersaid.

“The report is very detailed and requires more thoroughanalysis, but the FTC's initial conclusion says itall–'credit-based insurance scores are effective predictors of riskunder automobile policies.'” he added.

The FTC study–”Credit-Based Insurance Scores: Impact onConsumers of Automobile Insurance”–was mandated by the passage ofthe Fair and Accurate Credit Transactions Act (FACT Act) of 2003,along with a Federal Reserve study of credit use in banking.

Robert Hunter, insurance director of for the Consumer Federationof America, said he was “disappointed” by the FTC study, addingthat its conclusions were “kind of expected” given how the studywas conducted.

“They didn't go after real data,” he said. “They just took whatthe industry gave them.”

Mr. Hunter added that there were some positives to the report,however, most importantly that the FTC could not provide anexplanation of why credit scores affect a consumer's risk.

“It confirms there's no thesis,” he said, adding that the studyis “just correlating a data set.”

By the same token, Mr. Hunter argued, insurers could use anynumber of other factors that have been shown to correlate withrisk, specifically mentioning a study conducted in California thatshowed that the darker a consumer's hair color, the greater riskthey present for insurers.

“Why shouldn't we use hair color?” he asked.

Additionally, Mr. Hunter said that it was “important” that thereport also found a disaproportionate affect on consumers based onrace.

This article was updated June 23 at 2:33 p.m. EDT