Consumer Group Raps Insurers Credit Score Paper

Consumer Group Raps Insurers Credit Score Paper

NU Online News Service, July 9, 3:09 p.m. EDT?An insurance industry consumer gadfly has assailed an insurers' trade group saying it misrepresented a multi-state regulators' study of the carriers' use of credit records to rate customers.[@@]

Birny Birnbaum, executive director of the Austin, Texas-based Center for Economic Justice delivered his latest verbal blast at the industry in the wake of a white paper released by the National Association of Mutual Insurance Companies.

NAMIC's policy paper, being sent out to policymakers, argues that regulators, in examining possible disparate impact that insurance scoring may impose on different population groups, are taking an approach that is not permitted by insurance law.

Insurers argue that as long as they use credit scoring solely as a risk predicting tool they are acting properly.

Currently eight states led by Missouri are studying credit scoring issues.

Mr. Birnbaum said the NAMIC white paper showed, "The insurance industry cannot reverse itself fast enough on its credit scoring positions as yesterday's claims are proven to be false."

In 1998 and 1999, he said, the American Insurance Association presented a "study" to the National Association of Insurance Commissioners claiming that "credit scoring is not significantly correlated with income."

He added that the insurance industry also routinely cited a 1999 report from the Virginia Bureau of Insurance claiming the report concluded that "neither race nor income were reliable predictors of scores" ? a claim the VBI denies.

From 1998 through 2002, Mr. Birnbaum said, the insurance industry routinely presented these studies as proof that credit scoring did not have a disproportionate impact on poor and minority consumers.

At the same time the industry was denying any link between credit scoring and race or income, the industry was stonewalling insurance regulators and refusing to provide the data necessary for an independent analysis of the issue, Mr. Birnbaum charged.

He said the industry was happy to make its claims to policymakers while denying regulators and others the opportunity to verify the claims.

His group, Mr. Birnbaum said, had documented a clear relationship between credit scoring factors and income and the large number of credit scoring factors related to economic status instead of payment history.

He said that when the Missouri Department of Insurance issued its study earlier this year showing credit scoring had a disproportionate impact on residents in low income and minority areas, "the industry had to change course. Today, the industry no longer claims that credit scoring is unrelated to race or income"

"Today, the industry wants to characterize any criticism of credit scoring as ?a disparate theory' that has no place in insurance."

He noted that after the industry criticized the Missouri study because it did not include loss data ? only correlations between credit scores and race or income, the states involved in the multi-state study issued a data call to consider losses and other rating factors in a multivariate analysis.

Mr. Birnbaum argued that the NAMIC contention that "disparate impact is a legal standard that has not been applied to insurance" is belied by the fact that fair housing complaints have been successfully filed against insurers for unfair discrimination based on the disparate impact legal standard.

"How many times can the insurance industry stonewall and deceive regulators and policymakers before the insurance commissioners start testing industry claims and developing independent information for legislators and the public?"

Roger Schmelzer, NAMIC senior vice president, responded that the point of the NAMIC paper is that "unfair discrimination" and "disparate impact" are not interchangeable terms. "Disparate impact" is a legal doctrine that has to be proved. It does not simply exist," he said.

According to Mr. Schmelzer, "Either the Center for Economic Justice does not understand this or they are intentionally trying to confuse the issue.

"When courts have applied a "disparate impact" analysis, it allows for a "legitimate business justification" defense, which?if the analysis were applied to insurance?credit based-insurance scoring could easily meet because of its accuracy in predicting loss.

"Policymakers deserve a straightforward discussion of this issue. To the extent that it addresses the disparate impact theory and its relevance to insurance at all, the response is superficial and riddled with errors and misconceptions. Bringing clarity to the debate was precisely the reason NAMIC member companies felt so strongly about writing this paper."