Could instability in the Middle East and other market factors fueling the rise in gasoline prices reignite the state-by-state debate over the use of credit scores to help carriers establish auto insurance premiums?

Some industry observers fear that might turn out to be the case, with the cost of auto insurance–and the factors used to set prices–likely to become a more politically sensitive issue for families already coping with soaring gas prices cramping their family budgets.

Thus, any hike in auto premiums attributed to underwriting driven by credit scores could draw consumer ire, and put pressure on politicians to challenge insurers on the already controversial practice, some industry analysts and consumer advocates believe.

“Insurers are easy targets,” said Craig Weber, senior analyst at Celent, a consulting firm. “When people get squeezed, they look for the easy target to push back against.”

Mr. Weber also believes carriers are particularly attractive targets right now because of the industry's recent high profit levels. “Profitability in the insurance industry overall has been too high for consumer comfort, as it is for regulators,” he said. “Regulators are wondering why insurers have such great profits.”

Although Mr. Weber believes insurance industry profits are cyclical and are bound to fall, he said the current high level could add to political pressure seeking to ban the use of credit scores.

Similarly, some consumer advocates also believe the higher cost of essentials–such as mortgage rates and gas prices–will create more anti-insurance scoring pressure.

“Low-income people are being squeezed, and they're the ones who suffer as a result of the use of credit scores,” said J. Robert Hunter, director of insurance at the Consumer Federation of America.

“The pressure will not cease and will build,” he said, adding that “there's no logical explanation” for the use of credit scores–although a new report by the Federal Trade Commission confirmed the practice's utility, as well as its disparate impact.

Low-income people “are very vulnerable,” said Mr. Hunter, explaining that their credit scores go down mainly because they get sick and have little or no health insurance, they lose a job, or are victims of a disaster–such as Hurricane Katrina.

Even without the added pressure created by soaring fuel prices, opposition to the use of credit scores remains strong and periodic battles emerge.

Why do insurers keep using credit scores when it draws so much consumer ire and bad publicity? The clear answer is that most in the industry still find the tool quite useful in predicting risk and setting premiums.

Indeed, there is wide agreement among insurers that elements in an individual's credit score provide excellent indications of how that person behaves in broader areas–an individual who pays all bills on time and never misses a payment is unlikely to take big chances while driving a car, for example, insurers believe.

“Statistically, people who are very cautious financially are unlikely to be people who get in their car and drive 90 miles-per-hour down a residential street,” according to Robert P. Hartwig, president of the Insurance Information Institute.

“The use of credit information is one of the most powerful predictors of loss the insurance industry has come across in decades,” he added. “The statistical correlation is there, and that's what matters.”

To make use of this tool, insurers buy data from one of the national credit bureaus and run it through a formula developed in-house or by a third party to determine the applicant's “insurance score,” which helps indicate how much that individual should pay in premiums.

Some companies depend heavily on insurance scores, while others mix it with many additional factors. Some carriers don't use insurance scoring at all.

However, consumer advocates argue that the insurance scoring system exposes drivers to arbitrary factors not linked to their actual exposure. For example, what about an insured with a perfect driving record, but someone in the family suddenly contracts a serious and expensive disease, and the insured falls behind on credit card payments? That could cause a credit score to plummet and the insured's insurance premiums to soar. Is that individual any less responsible in driving a car than a few months earlier?

Critics argue that at the very least, insurers should not be allowed to base rates or provide coverage merely on the basis of a credit score, and insist that an individual should know to what degree their credit score affects the insurance premium.

Individuals also should be able to determine the accuracy of credit reports used by insurers, and should be able to appeal decisions insurers make based on credit history, consumer advocates contend.

There has been progress in addressing such concerns. The National Conference of Insurance Legislators has drawn up a model bill that answers many of the critics' complaints. The model bill, or versions of it, has been adopted in about two dozen states.

However, the industry argues that the model bill could significantly increase the cost of underwriting. Carriers would have to give information to each customer whose credit score was used even in small part to determine a premium, as well as give each such customer an opportunity to appeal.

One of the most controversial issues is whether credit scoring is being used to discriminate against members of minority groups or the poor.

Last year, U.S. District Judge Fred Biery approved a class-action settlement between Allstate Insurance Company and a group of African-Americans and Hispanics who said Allstate had been charging them higher premiums than for other customers because of the use of credit scores, rather than the actual exposures they pose.

The settlement included some significant concessions on Allstate's part. The carrier agreed to pay almost $12 million (mainly to cover attorneys' fees), establish a new algorithm in its use of credit scores and make the algorithm publicly available.

Allstate also agreed to adopt an appeals program under which all customers who experience extraordinary events that impact their credit information could potentially obtain premium reductions.

In the Allstate case, Judge Biery specifically said he found no evidence that Allstate knowingly had engaged in discrimination. (Allstate did not return phone calls for comment.)

Given the persistent opposition posed by consumers and their advocates, some insurers think the days of insurance scoring are coming to an end.

Although State Auto Insurance considers insurance scoring one of the most predictive indicators of subsequent loss patterns, a representative for the Columbus, Ohio-based carrier, Terrence Bosshier, said his company has been cutting back on its use.

“We've used it as one of many variables in our ratings,” noted Mr. Bosshier. “Having said that, while we think it's a valid, statistically proven metric, we also think if it were to be outlawed in some states, we could price our products adequately without credit scoring.”

However, he added, while his carrier is preparing for life without this underwriting and rating tool, “we definitely think insurance scoring should be allowed to be used as one of many variables in the pricing of insurance products.”

Mr. Bosshier said he would “have some concerns” about legislation that totally does away with the use of credit scores, adding that elements in some bills restricting the way insurers employ this tool could increase the cost of underwriting. “Much depends on how far the measures would go,” he said.

“We've altered our algorithms in the last couple of years to reduce the impact of insurance scoring on our products,” according to Mr. Bosshier. “We have attempted through other pricing metrics, other criteria, to add more variables, multivariant-type pricing points–an interplay between different criteria on a policy–to minimize the impact of credit or insurance scoring on the products.”

He describes the process as an “ongoing evolution,” adding that if credit scoring were totally outlawed in a particular state, “it would have a smaller impact on State Auto than it would have, say, five years ago.”

State Auto has been employing insurance scoring for about 10 years, but uses it only for new customers–for “an unknown quantity who comes into an agent's office for the first time. We don't use it for existing customers.”

“The horror stories you hear where the little old lady had an insurance policy for 20 years and a company credit scores her and triples her premium or cancels her policy–that wouldn't occur at State Auto,” according to Mr. Bosshier.

Special Reports /

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