Using credit scores to set auto premiums is questionable practice
Using credit scores as a factor in determining automobile insurance eligibility and premiums is a standard industry practice. For years, insurers have maintained that a person's scores, originally intended to measure creditworthiness, are also a predictor of whether -- and how often -- someone will file an auto insurance claim.
For years, consumer groups have urged state and federal governments to see the flaws in that practice. Consumer advocates say using credit scores to set insurance rates unfairly hurts African-Americans and Hispanics because those groups tend to have lower credit scores and thus end up paying more for auto insurance. They also complain that errors in credit files can result in lower scores and thus higher insurance premiums.
The Federal Trade Commission recently weighed in, releasing a study that largely sides with the industry.
The Fair and Accurate Credit Transactions Act of 2003 charged the FTC with investigating the use of credit scores in setting auto insurance rates. The FTC was asked to determine the impact of credit-based insurance scoring on certain groups of consumers, such as low-income and minority consumers.
Insurance companies began to use scoring in the mid-1990s. Today, all major automobile insurance companies use the credit-based scores in some capacity, according to the FTC report.
The FTC, using research, public comment, and industry data, concluded credit scores predict the number of claims consumers file and the cost of those claims.
The Consumer Federation of America, the National Fair Housing Alliance, the National Consumer Law Center, and the Center for Economic Justice all criticized the FTC's methodology.
"The FTC's approach to collecting data for the analysis is like the federal government trying to do a study on the health impacts of tobacco use with data selected by tobacco companies for the study," said Allen Fishbein of the Consumer Federation of America.
Commissioner Jon Leibowitz, who voted to release the report, said that although the analysis appears to find insurance scoring does predict the risk of insurance claims, "the differences in credit-based insurance scores across racial and ethnic groups are a disturbing reminder that our society is still not race blind, and that vestiges of our history of discrimination remain ever-present."
The insurance industry, however, was pleased with the FTC report.
"We believe scores reduce subsidization of bad risks by good ones, meaning most consumers pay less for insurance," said David Snyder, vice president and assistant general counsel for the American Insurance Association.
Still, pressure from consumer groups has led many states to limit how auto insurers use credit history. Many of the laws are based on the "Model Act Regarding Use of Credit Information in Personal Insurance" written by the National Conference of Insurance Legislators, an organization of state legislators whose primary focus is insurance legislation and regulation. It created the model law to prevent insurers from using insurance credit scoring as the sole basis for denying, canceling, or nonrenewal of a policy or increasing rates.
As of June 2006, 48 states had taken some form of legislative or regulatory action banning or restricting the use of insurance credit scores, the FTC said.
Certainly consumers should practice good financial habits such as paying bills on time and limiting their use of credit. But should someone pay more for auto insurance because he or she lost a job and couldn't pay his or her credit card bill?
"Insurance premiums should be based on the risk of an accident, not a consumer's bill-paying record for other goods and services," said Norma Garcia, senior staff attorney for Consumers Union.
After assessing all the research and data from the industry and after hearing 200 comments from the public, the FTC still couldn't determine the correlation between low credit scores and the increased likelihood that someone will file an auto insurance claim.
If you don't know why, then how do you know the practice is fair?
Michelle Singletary is a columnist for The Washington Post. She can be reached at singletarym@washpost.com. 
