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The Honolulu Advertiser
Posted on: Saturday, July 21, 2001

Credit scoring used as basis for driver risks

 •  Critics claim credit scoring penalizes poor, minorities

Advertiser Staff and News Services

Paying bills late has unintended consequences for many Americans. It makes their car insurance rates higher.

In Hawai'i, a state law restricts insurers from using any part of a credit report in figuring insurance risk and rates, according to Insurance Commissioner Wayne Metcalf. Auto insurers nationwide are relying more on credit scoring in rate decisions.

Advertiser library photo • July 1999

And if a driver has a bankruptcy or financial turmoil in his past, coverage may be hard to afford or unavailable altogether.

In a practice drawing opposition from consumer advocates and scrutiny from state officials, auto insurers are relying more and more on credit scoring when making their rate decisions. More than half of auto insurance companies are believed to use credit scoring in setting rates.

In Hawai'i, a state law restricts insurers from using any part of a credit report in figuring insurance risk and rates, said Insurance Commissioner Wayne Metcalf.

"We don't allow it directly or indirectly," he said.

The state's opposition, he said, arises from the concern that use of credit data could lead companies to exclude certain applicants who, for example, come from lower-income groups.

The state's largest auto insurance carrier, State Farm Insurance, recently adopted an underwriting model that uses certain credit characteristics in predicting driving risk. But company spokeswoman Carolyn Fujioka said State Farm's methods do not clash with the state's concerns because its assessments don't look at sensitive factors such wealth, income or creditworthiness.

Instead, she said, the addition of certain elements of a credit analysis, combined with the more important driving and claims history, offers a more accurate prediction of risk.

"What we're trying to do is make the pricing fairer," she said.

Fujioka said State Farm officials will follow up with Metcalf to make sure their methods fall within rules.

Though State Farm keeps its emphasis on driving records, industry watchers say some insurers are putting more weight on credit history.

The credit scores, derived from a consumer's credit background, are a relatively quick and inexpensive way for insurers to underwrite and assess risk. They say it increases competition by enabling more companies to operate nationwide, while allowing them to reward financially responsible clients with the best rates.

"Financial stability is an extremely powerful predictor of future losses," said counsel Steven Sheffey of Allstate Corp., the Northbrook, Ill.-based No. 2 car insurer. "It helps us write insurance, we can keep the cost of insurance less, and we also have a more fair underwriting structure."

But consumer watchdogs want the practice reined in out of concern that insurers, who are generally not required to disclose how they apply the data, could use credit histories unfairly. They also argue that credit scoring typically rewards white, affluent consumers while penalizing the poor and minorities.

"We worry about it because we think it might be a surrogate for prohibited factors such as race and income," said Robert Hunter, insurance director for the Consumer Federation of America, who urged Congress last month to push for more regulatory oversight.

About 20 states have introduced legislation to prohibit or restrict the use of credit scoring, and several have ruled it cannot be the sole determining factor in premium or underwriting decisions.

In Hawai'i, Metcalf said he simply doesn't buy the idea that use of credit data benefits the social good.

"I've heard the argument," he said. "I just don't find it acceptable, and neither does the state Legislature."

Tim Dayton, general manager for Geico in Hawai'i, said his company does not use credit data precisely because the state prohibits it.

"But we would prefer to use it because it's statistically valid," he said. "We don't think it's discriminatory because credit is within people's control."

Other insurers insist as well that there's no discrimination, but as consumers learn about credit scoring, more are stepping forward to protest.

Colorado's insurance department, for example, moved to limit how the scores are used after being barraged by complaints.

"It may work, from a statistical standpoint," said Colorado Insurance Commissioner William Kirven. "But it has to be used judiciously, and you have to not penalize people just because they have a low score."

But David Birnbaum, executive director of the Center for Economic Justice, said there has been no comprehensive independent study of a link between credit problems and car accidents.

"Even if there was a definitive relationship, that doesn't mean it has to be used," said Birnbaum, whose Austin, Texas-based nonprofit group advocates on behalf of low-income consumers on insurance matters. "There can be errors in your credit history. And it could be penalizing people who simply encountered hardship and have chosen to pay medical bills instead of credit cards."

Addressing the issue in a 1998 study, the Public Interest Research Group found that 29 percent of 133 credit reports it examined contained serious errors.

Similar concerns have been raised involving the use of credit scoring to determine whether to grant home loans.