Consumer advocate Birny Birnbaum entered the lion's den this week and told an insurer conference that their use of credit scores to rate customers can be "inherently unfair."
The session==entitled "Credit-Based Insurance Scoring: Valid Risk Assessment or Unfair Discrimination?"==which included two other speakers with a differing view, was held at the annual National Association of Mutual Insurance Companies convention.
When moderator Steve Brostoff, editor and publisher of Liability & Insurance Week, began the program by asking attendees how many used credit scoring with their companies, a third or more raised their hands.
As a counterpoint to Mr. Birnbaum, who is executive director at the Center for Economic Justice in Austin, Texas, the session also heard from Roger Clegg, vice president of the Center for Equal Opportunity, a conservative Washington think tank, and Robert Detlefsen, NAMIC public policy director.
Mr. Clegg said credit scoring was a means of fairer pricing and Mr. Detlefsen described it as providing accurate risk analysis.
Mr. Birnbaum, however, said credit scoring factors that are given weight correlate to low income and racial minority status.
Insurance, he said, is an important tool for economic development and financial security, which "shouldn't be available only to the most affluent."
"Public policy says you can't discriminate on the basis of race," he said, adding that credit scoring undermines public policy goals by increasing the cost of a financial security tool.
The scoring process, he said, can be inherently unfair to someone who has lost a job. "Why penalize them?" he asked.
As housing prices have risen, mortgage lending has recently doubled, he noted, explaining that a higher level of borrowing can lower an individual's credit score. "Why should consumers be penalized?" he asked.
Mr. Clegg said insurers' better predictive ability using credit scoring means fairer pricing, and the "vast majority of all skin colors are going to be helped, not hurt, and allowed more options."
He said any legislative ban on credit scoring is "completely unsupportable."
Mr. Detlefsen said the price of insurance should "rise and fall with the level of risk for each individual, and credit scoring is the most accurate risk analysis available to insurers."
Ignoring risk of loss, he suggested, discriminates against people with low level of risk. "It's indiscriminate collectivization of risk," he said.
Risk collectivization, Mr. Detlefsen continued, "violates a notion of fairness," adding that elimination of credit rating would amount to equal treatment of those who are not equal risks.
Credit scoring, he said, serves a rational business purpose and is not intended to impact racial minorities.
Mr. Birnbaum riposted that whatever the reason, credit scoring remains unfair and had a racial impact, adding that the other speakers had answered this point only with "philosophical musings."
He noted that the government stepped in after companies had denied "entire neighborhoods" insurance because of restrictions on covering older, less valuable homes, which served as a "proxy" for race discrimination.
Mr. Birnbaum's arguments appeared not to sway his audience. One member, who spoke up, said she was so overcome that she had written her comments down to make sure she could voice her outrage against what she called a "political twisting of truth."
"I use credit scoring. It reduces a lot of rates," she said.
Mr. Birnbaum said he was prepared to back up all his assertions, adding that "credit history is not a measure of financial responsibility and that's not why insurers use it."
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