Property-casualty groups have voiced strong opposition tolegislation introduced in the U.S. House of Representatives tolimit the use of credit information by insurers in underwriting andrate-setting.

"Contrary to what the authors of this legislation assert, thisbill is not in the best interests of consumers," said NeillAlldredge, vice president for state and regulatory affairs at theNational Association of Mutual Insurance Companies. "Study afterstudy has shown credit-based insurance scores are an accuratepredictor of future claims that enable insurers to offer coverageto more consumers at a fair price."

The legislation--H.R. 5633, The Non-Discriminatory Use ofConsumer Reports and Consumer Information Act of 2008--wasintroduced by Rep. Luis Gutierrez, D-Ill. The bill has two powerfulco-sponsors--House Financial Services Chair Barney Frank, D-Mass.,and Rep. Mel Watt., D-N.C., who chairs the Financial ServicesSubcommittee on Oversight and Investigations.

The legislation would bar the use of credit information wherethere is a government finding of discrimination based on that use,or if the credit information serves as a proxy for race orethnicity.

The argument being made by Mr. Alldredge--that credit-basedscores have been shown to have predictive value for likelihood ofinsurance losses--was echoed by virtually every property-casualtygroup.

They also point out that the majority of consumers affected bytheir credit scores receive a benefit--typically a discount--forhaving high credit scores.

"Credit scoring has helped improve auto and homeowners markets.Most consumers are helped by it, and it is already regulatedeffectively. So we see that this bill would not be beneficial,"according to David Snyder, assistant general counsel for theAmerican Insurance Association.

"Numerous federal and state studies have documented the value ofcredit scoring in personal lines of insurance," he added.

Among the most controversial of studies looking at the issue wasone released last summer by the Federal Trade Commission, mandatedas part of the 2003 Fair and Accurate Credit Transactions Act. Thestudy was actually added to that bill via an amendment offered byRep. Gutierrez.

The report ignited controversy when it was released. Consumeradvocates and other opponents of credit scoring questioned itsfindings, which were based on information voluntarily provided byinsurers, and one FTC member filed a dissent over the methodologyused in crafting it.

David Sampson, president of the Property Casualty InsurersAssociation of America, questioned the interpretation of the FTCreport by the latest bill's backers. Where the sponsors argue thatit found race serving as a proxy in collision, comprehensive andbodily injury auto coverage, PCI said the report found credit-basedscores had little effect as a proxy in such a role.

"Using this information allows for more accurate pricing andsaves many consumers money on their automobile and homeowners'insurance policies," Mr. Sampson said. "Consumers expect to pay afair price for their insurance that matches their individual risk.Insurers simply want to use the most accurate, statistically validtools available to achieve that goal. Credit information has provento be one of the most accurate methods of predicting losses."

The sponsors of the bill were equally harsh on the insuranceindustry in announcing the bill, citing what they see as unfair andpotentially discriminatory practices.

"Insurance companies are increasingly and alarmingly usingcredit information contained in credit reports to determinewhether, and at what price to offer personal lines of property andcasualty insurance," said Rep. Gutierrez. "This includes automobileand homeowners insurance. For families who are only beginning toestablish credit--including minority and immigrantcommunities--this practice puts them in a difficult and unfairfinancial position."

In announcing the bill's introduction, Rep. Gutierrez noted thatthe FTC said in its report that all major auto carriers make use ofcredit information in one way or another. He also pointed out thatminorities tend to have lower credit-based scores and often end uppaying more for their coverage.

"The insurance industry has been increasingly using creditinformation to underwrite and rate personal lines of insurance,"said Rep. Watt. "Government studies have shown that credit scorescorrelate with race or ethnicity, so minorities often end up payingmore for personal lines of insurance even when they are safedrivers or have never filed claims."

In a related story, the House legislation would likely meanhigher premiums for senior citizens, PCI warns in an internalworking document.

The PCI working paper, obtained by National Underwriter, whichwill be used by PCI lobbyists to persuade legislators to oppose thebill, is based on a study on credit scoring issued by the FederalReserve Board last August.

Based on the Fed study, the PCI paper argues that if consumerswith low credit scores pay higher premiums, and consumers with highcredit scores pay lower premiums, seniors benefit.

"If not, seniors suffer," the PCI paper said. "The FederalReserve report demonstrates that older individuals, as a group,tend to have higher credit scores, and that credit-based insurancescores are effective risk predictors."

The PCI paper contends that "the use of credit scores currentlybenefits seniors--and most insurance buyers--by helping insurerscharge premiums based on risk."

Most insurance consumers, including seniors, benefit frominsurer use of credit scoring, the PCI paper added.

The paper said a study by the Arkansas Insurance Department lastJuly demonstrated that consideration of credit scores eitherlowered, or did not affect, premiums for 90.2 percent of autoinsurance consumers and 90.8 percent of homeowners' insuranceconsumers.

"Credit scoring lowered auto insurance rates for more than threetimes as many consumers than those who saw an increase," the papersaid.

With cover art of burning credit card:

Will Subprime Mortgage Crisis Reignite The Insurance CreditScoring Debate?

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