Auto insurance firms use illegal criteria, review says
By Curtis Lum and Frank Cho
Advertiser Staff Writers
Companies that insure more than half of Hawai'i's drivers have been illegally using criteria such as credit history and marital status in determining auto policy premiums and may face thousands of dollars in fines and other penalties, the state's insurance commissioner said yesterday.
Initial results of a three-week review of dozens of Hawai'i's auto insurers found that some of the largest policy writers in the state have been violating state law in setting rates, state insurance Commissioner Wayne Metcalf said.
"I am surprised and disappointed that some insurers are violating the law," Metcalf said. "Most of these companies do business in virtually every jurisdiction in the country. Every state has their approach to the regulation of insurance, and carriers are required to know what each state's regulatory scheme is."
Hawai'i's insurance code prohibits insurers from considering race, age, ethnic extraction, creed, length of driving experience, marital status, credit bureau ratings or physical disabilities when determining premiums. Nationwide, however, more than half of all auto insurance companies are believed to use credit scoring in setting rates, a practice that has drawn fire from consumer advocates.
Among Metcalf's initial findings into what factors insurers have used to calculate premiums:
• DTRIC, a major Hawai'i insurer, was illegally using drivers' marital status.
• AIG Hawaii, one of the three largest insurers in the state, was illegally using drivers' ages.
• State Farm Insurance Cos., the largest insurer in the state, was illegally using credit bureau information.
• Progressive Insurance, another large insurer, said it does not use a customer's credit rating to determine premiums, but the company's Web site says it does.
• All State Insurance, which last year was found in court to be in violation of using length of driving experience as a criteria, has appealed that case but continues to use the criteria in determining premiums.
Metcalf said DTRIC, AIG and State Farm have agreed to stop using those criteria in their analyses for consumer policies but may still be subject to fines. An investigation into Progressive is under way.
Corporate officials for DTRIC, AIG, Progressive and All State could not be reached for comment.
Carolyn Fujioka, spokeswoman for State Farm Insurance, said the insurer has stopped using the criteria.
"We made it clear we do not agree with his determination, but that we would discontinue use of the credit characteristics we used," said Fujioka.
Most of the 150 companies that write auto insurance policies in the state responded to the commissioner's inquiry and reported that they do not use discriminatory data in arriving at premiums and thus are in compliance with Hawai'i law.
Metcalf said his office still will investigate each company to verify the claims, starting with the largest policy writers. Of the largest in the state — which also include GEICO, Island Insurance, First Insurance and USAA — only GEICO has been cleared so far, he said.
The firms, along with AIG, State Farm and Progressive, control more than 85 percent of the auto insurance market in Hawai'i, Metcalf said.
But Metcalf said some Hawai'i insurers still have not responded to his request for information, including two major policy writers in the state: RLI Insurance Co., with nearly 2,000 policies, and Hartford Underwriters Insurance Co., with more than 38,000.
Officials with Hartford and RLI could not be reached for comment.
Metcalf said that beginning Monday he will begin fining the nonrespondents $1,000 a day until they respond. Metcalf said some carriers who are licensed in the state but not actively writing policies and who also have not responded will not be immediately fined.
Metcalf said he is still weighing possible penalties for insurers who have used discriminatory criteria in setting drivers' premiums, but said the law allows him to levy fines of up to $10,000 for each time an insurer has calculated a driver's premium using such criteria.
"The fines are going to be based on the number of violations and how serious the violations were," he said. "These companies represent well over 50 percent of the market."
Metcalf said he has not determined what other action he might take, but is considering exploring whether he can order some insurers to offer customer rebates.
The commissioner's investigation into auto insurers' premium-setting policies was triggered last month by a finding that State Farm was violating state law with its use of credit bureau information as a factor in determining drivers' premiums, Metcalf said.
Credit scores, derived from a consumer's credit background, are a relatively quick and inexpensive way for insurers to underwrite and assess risk. Insurers say it increases competition by enabling more companies to operate nationwide, while allowing them to reward financially responsible clients with the best rates.
But the practice has drawn opposition nationwide from consumer advocates who want it reined in because 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.
In Hawai'i, state law prohibits the use of such data in setting premiums because it could lead companies to exclude certain applicants who, for example, come from lower-income groups.
"Credit reports often contain erroneous information," Metcalf said. "I think that it is fair to say that most Hawai'i consumers would be startled to find that their credit rating reports were used without their knowledge in determining their abilities to pay for their auto insurance coverage."
Staff writer Michele Kayal contributed to this report.
