Florida Regulators Probe Insurer Use Of Credit Scores

Florida regulators grilled insurance representatives last week over what they were doing to make sure their use of consumer credit scores in auto policy underwriting and pricing does not negatively impact minority and low-income groups.

The hearing was the latest battleground in a six-year confrontation between insurers and the Florida Office of Insurance Regulation over the use of consumer credit history to set premiums.

Five carriers were subpoenaed to appear--Allstate, GEICO, Nationwide, Progressive and State Farm. Company representatives emphasized that credit scoring is just one factor used to evaluate risks, while consumer advocates questioned the reliability of such information.

Regulators repeatedly cited a Federal Trade Commission report's conclusion that African-Americans and certain Hispanics are substantially overrepresented in the lower tier of credit scores and underrepresented in the upper echelon. They asked insurers if they have taken any actions to mitigate the impact of credit scores when underwriting prospects from these groups.

But insurers said that to imply credit scores are inherently racist because of that FTC finding is misguided. They noted that other rating factors are not equally distributed among racial groups, either.

They noted that within minority groups, credit information was still predictive of future insurance losses, according to the FTC report.

Regulators also questioned what the impact on rates would be if the use of credit scoring was banned in Florida. A representative from Allstate said some Florida drivers could see increases of as much as 30 percent, while other drivers could see decreases.

But Birny Birnbaum, executive director of the Center for Economic Justice--a consumer group based in Austin, Texas--criticized insurer use of credit information because, he said, it is not objective or reasonable. He said some factors that go into credit scores penalize responsible individuals.

For example, he noted that consumers have been advised not to cancel old credit cards they do not use if they want to improve their credit score.

Additionally, he said consumers have been told by news outlets reporting on consumer issues that if they have a delinquent account that's old, they should not pay it off before seeking credit, because the delinquency then becomes current.

Asked if states that have banned the use of credit scoring have seen rates rise and competition fall, Mr. Birnbaum said states such as Hawaii and California have not allowed the use of credit information for many years, so it is difficult to do a before-and-after comparison. But he added that the absence of using credit information has not prevented competition in those states.

Florida Insurance Council Executive Vice President Sam Miller said the industry has been battling with the state insurance department over this issue since 2003, when the legislature passed a measure approving insurer use of credit scores.

However, he said, in implementing the law, regulators have continually come back with altered versions of a rule that would make use of credit scoring impossible in practical terms, calling the recent subpoenas "their latest strategy." Efforts are also being made, he said, to pass legislation prohibiting the use of credit scores.

A representative for Insurance Commissioner Kevin McCarty, Ed Domansky, said the industry has been "able to stall [regulations] repeatedly over the years." He said the latest rule being proposed would require companies to make available to the OIR their credit scoring processes, including their formulas and information on how it fits into their underwriting decisions.

The use of credit information has also received attention in Connecticut, where the legislature's Insurance and Real Estate Committee held a hearing last week on a bill that would prohibit insurers from using credit-based insurance scores in the underwriting and rating of auto policies.

(Additional reporting by Daniel Hays.)