Insurer Use of Credit Scores

NCLC has just released a report titled "Credit Scoring and Insurance: Costing Consumers Billions and Perpetuating the Economic Racial Divide," arguing against using credit scores to determine whether consumers will get home and auto insurance, and for what price.
    Insurance companies use credit scores - three digit numbers generated using a consumer's credit report - in insurance underwriting and ratesetting.  The new NCLC report documents the numerous problems with this practice, include a summary of the many studies indicating enormous racial disparities created by credit scoring.   
    "Credit scores are essentially a numerical expression of the huge economic divide we have based on race in this country," noted Chi Chi Wu, NCLC Staff Attorney and the report's primary author, "As such, the use of these scores in insurance perpetuates and reinforces this racial wealth divide."
    The NCLC report includes an analysis by Birny Birnbaum of the Center for Economic Justice on how insurance credit scores cost consumers billions of dollars every year, potentially in the neighborhood of $67 billion.  According to Birnbaum, "Insurers' use of credit scoring - the introduction of many, many rate levels based predominantly on the insurance score - has contributed to a dramatic increase in profitability."
Other issues addressed in the NCLC report include:

    Consumers lack information about the use of credit scoring in granting or pricing insurance, with only 36% in one survey indicating they know about the practice.

    Some of the factors used in insurance scoring models are questionable, such as penalizing consumers with fewer than 2 credit card accounts.  Credit scoring in general has been criticized for high rates of errors and data inconsistency between the major credit bureaus.

    The insurance industry alleges that credit scoring is predictive in forecasting which consumers will have higher losses yet they have not offered a satisfactory explanation as to why this correlation exists.

    Anti-discrimination laws present limited avenues to challenge the racial disparities created by credit scoring, especially with respect to home insurance.

    The report's authors call upon states to outlaw the practice of using credit scores in insurance.  The NCLC Insurance Scoring report is available at this link at NCLC's website.

Comments

[zhafran]

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[Kim]

I agree with this outlawing this practice. I've been with Farmers Insurance in WA.State and NV for over 15 yrs. Prior to that it was American Family in AZ. I feel that that a Credit rating has nothing to do with a persons driving habits, yet everything to do with paid prem.'s to the agency. Some pay for the yr or 6 mos in advance,etc. Take a person that has been thru a horrible divorce, or a child with cancer ? Maybe caring for a elderly parent. Should these people actually be forced to pay higher rates because of their misfortune ? Its very sad. I've considered going into the Insurance industry and leaving a 15 yr old banking career, however the laws are worse on people who attempt to save moeny on their policys as it is to retain a loan! Hopefully congress listens and the act will one day pass .