A Missouri Department of Insurance study on the impact of credit-based insurance scores on low income and minority consumers reportedly contains fatal flaws in methodology that invalidate the report’s findings and make the study a poor basis on which to develop sound public policy.
“The Department of Insurance study ignored the most important factor considered by every insurance company when writing a policy – risk of loss,” said Diana Lee, assistant vice president, research for the Property Casualty Insurers Association of America (PCI). “The study only analyzed the correlation between credit and socioeconomic status and did not take into account the policyholders’ loss experience. Insurers do not collect information on race, ethnicity, or income. They only compile data on risk factors and they apply these factors equally to every consumer.”
The Department of Insurance study created numerical models that suggest that consumers in low income or high minority ZIP codes have lower average insurance scores than consumers in high income or low minority ZIP codes. The Department alleges that its models verify that the use of credit-based insurance scores have a “disparate impact” on minority and low income consumers by unfairly increasing their insurance premiums. Missouri Governor Bob Holden immediately called for the legislature to ban the use of insurance scores to underwrite and rate auto and homeowners policies.
“Other studies, such as those conducted by EPIC Actuaries and the University of Texas, show that insurance scores are a powerful predictor of risk across all states, regardless of whether they have high or low minority populations and whether they have high or low median household income,” said Lee.
“The National Association of Insurance Commissioners has been studying this issue for several years and has not felt it necessary to conduct such a study,” said Robert Zeman, senior vice president, industry and regulatory affairs for PCI. “Over the past three years, legislators and regulators in many states have taken action to regulate the fair and responsible use of insurance scores. In addition, Congress recently enacted the Fair and Accurate Credit Transactions Act (FACT), which reauthorizes the use of insurance scores originally granted by federal law over 30 years ago. The FACT Act contains a provision calling for Congress, in conjunction with other federal and state agencies, to conduct a comprehensive study of the impact of credit reports on consumers – not just insurance prices, but financial services, housing, and employment.”
“Because credit history has such a significant effect on so many aspects of our lives, it’s important for businesses and regulators to devote their time, energy and effort to educate consumers about the impact of credit history and ways to improve their credit reports,” said Zeman.
PCI contends that the results of the study are nullified because of its overly simplistic methodology. Moreover, the Missouri legislature rejected bills that would ban the use of insurance scores in 2002 and 2003. Instead, the legislature enacted a law that prohibits insurers from using insurance scores as the sole reason to cancel, non-renew or refuse to issue a policy and requires insurers to provide state regulators with actuarial justification for rate increases or decreases based on a consumer’s insurance score. PCI also questioned the intent of the study.
“The study was clearly intended to support the Department of Insurance’s view that insurance scores should be banned,” said John Lobert, senior vice president, state legislative affairs for PCI. “However, the Department’s view conflicts with the action taken by state legislators last year to allow insurance scores to be used with reasonable restrictions. We believe the action taken by state legislators in Missouri – and in dozens of other states – is in the best interest of all consumers because it protects policyholders and upholds the fundamental principle of risk-based pricing. We will continue to oppose any political efforts to ban the use of insurance scores in Missouri and other states.”
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