Insurers Put Back On The Hot Seat In House Probe Of Credit Scoring

However, at the same time, Chi Chi Wu, representing the Boston-based National Consumer Law Center, said credit reports suffer from "unacceptable rates of inaccuracy." She argued that the practice "creates wide racial disparities and is fundamentally unfair to consumers."

Illinois Insurance Commissioner Michael McRaith took a middle ground, while attempting to convince Congress that the states have the situation under control. He noted that over the years, "insurance regulators have heard arguments and rhetoric, if not diatribe, on both sides of this public policy question."

Mr. McRaith, testifying on behalf of the National Association of Insurance Commissioners, said that to deal with this controversy, regulators are continuing to examine both sides of the issue. He noted that "distinct from the public policy debate, regulators are presently investigating:

o "The components of an insurance score;

o "The extent to which any one rating factor affects a consumer;

o "Whether consumers have an appropriate understanding of the credit factors that affect a particular insurance policy; and

o "Whether insurance score vendors should be subject to enhanced transparency or supervision."

Mr. McRaith testified that 48 states regulate the use of credit scores for insurance, noting that as a safeguard against abuse, "typically states will not allow credit-based insurance scores to be used as the sole basis for increasing rates or denying, canceling or nonrenewing policies."

The AIA's Mr. Snyder said insurance scoring has contributed favorably to personal lines markets in several ways.

For one, he said, it "provides an objective, cost-effective risk measurement tool for all components of auto insurance coverage," citing a 2003 actuarial study.

Second, he said, "by providing a comparative and quantitative measure for each risk, it has allowed insurers to move toward pricing which is much more tailored to individual risk, replacing the old system that relied exclusively on large group classifications, such as geographic territory or age."

Third, he said credit scoring has actually encouraged insurers to write more coverage because "they have more confidence that they are able to accurately predict and price for all levels of risk."

Anne Fortney, a partner at Hudson Cook LLP in Washington, D.C., also defended the use of credit scoring. She argued that if an insurer cannot use credit information as a factor in assessing risk in the case of property and casualty insurance, "the insurer's ability to price effectively for risk will be diminished."

The inevitable result "will be higher premiums for most consumers and less availability of insurance for marginal insurance risks," according to Ms. Fortney, whose law firm specializes in consumer financial services. Their website (www.hudco.com) says the firm "represents many of the nation's top banks, savings associations, holding companies, finance companies and mortgage bankers, insurance and securities companies, investment banks and e-commerce firms."

Ms. Fortney also touched on an argument by critics that the data supports the notion that use of crediting scoring has a higher than average impact on the poor and minorities.

She said that, while each case is different, "it is important to understand that the existence of a disparate impact on a protected group would not, standing alone, constitute a violation of the Fair Housing Act or the Equal Credit Opportunity Act."

She explained that "once such a disparate impact is proven, the burden shifts to the defendant to show a legitimate business reason for the use of a policy or practice that caused the disparate impact."

In a related development, a bill opposed by insurers that would have banned credit-based insurance scoring in Wisconsin never made it out of committee before the end of the state's legislative session.