Consumer and Civil Rights Groups Reject Federal Report on Insurance Credit Scoring

Consumer and Civil Rights Groups Reject Federal Report on Insurance Credit Scoring

Fatally-Flawed Report Relies on Handpicked Data by Insurance Industry,
                Fails to Respond to Congressional Mandate

   WASHINGTON, July 24 /PRNewswire-USNewswire/ -- Representatives of
consumer and civil rights organizations today condemned a
congressionally-mandated report on insurance credit scoring by the Federal
Trade Commission (FTC) as biased insurance industry propaganda. The groups
called for Congress to reject the defective study and ban the use of credit
scoring in insurance.
   Insurance credit scoring is the use by insurers of consumers' credit
reports for determining insurance eligibility and premiums. Unknown to most
consumers, insurers' use of consumer credit information has spread to
almost all insurers and is one of the most important factors in determining
how much a consumer pays for auto or homeowners insurance.
   Previous studies by the Missouri and Texas Departments of Insurance
have found that insurance scoring discriminates against low income and
minority consumers because of the racial and economic disparities inherent
in scoring. The Missouri study concluded that a consumer's race was the
single most predictive factor determining a consumer's insurance score and,
consequently, the consumer's insurance premium.
   Before the introduction of the credit scoring systems the insurance
industry had used other unsupported standards and stereotypes with a racial
proxy effect. After the major companies were sued for fair housing
violations and were forced to eliminate these practices, the industry
introduced a new practice -- credit-based insurance scoring -- that
consumer and civil rights groups see as re-introducing racial and ethnic
effects into the pricing of insurance.
   The relationship between insurance credit scores and race is so strong
that even though the FTC used data handpicked by the industry, it found
that credit scoring discriminates against low income and minority
consumers, and that insurance scoring was a proxy for race.
   Representatives of the Consumer Federation of America, the National
Fair Housing Alliance, the National Consumer Law Center, and the Center for
Economic Justice said the FTC study is fatally flawed because the insurance
industry controlled the data used in the analysis. Instead of requiring the
submission of comprehensive policy data by a large number of insurers, the
FTC used data handpicked by the insurance industry.
   "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. "By relying on handpicked
data, the insurance industry was unnecessarily given opportunity to control
the outcome of the study."
   The FTC study also confirms that, despite growing reliance on
credit-based insurance scores, scant evidence exists to prove there is a
meaningful connection between a consumer's score and auto insurance losses.
Without the need to demonstrate such a connection, insurers could use any
consumer characteristic, such as hair color, to price insurance products.
   "Despite finding no explanation for the alleged connection between
insurance scores and losses, the FTC report somehow concludes credit
scoring is valid and good for consumers. This is not an impartial analysis,
but simply advocacy for insurers," said Birny Birnbaum of the Center for
Economic Justice. Birnbaum, a former insurance regulator, has studied
insurance scoring for over 15 years.
   The groups also dismissed the report for failing to respond to the
Congressional mandate to examine the impacts of insurance credit scoring on
the availability and affordability of auto and homeowners insurance, and
for parroting insurance industry propaganda about insurance credit scoring.
Section 215 of the Fair and Accurate Credit Transactions Act of 2003
required the Federal Reserve Board and the FTC to study the impact of
credit scoring on the availability and affordability of credit and
insurance and to determine whether credit scoring was truly related to
insurance losses or simply a proxy for race, income or other factors.
   "Incredibly, the FTC report downplays its own findings about the racial
impact of insurance scoring -- the primary question asked by Congress --
and emphasizes the allegedly 'predictive' nature of credit scoring," said
Chi Chi Wu, staff attorney at the National Consumer Law Center. "It's
outrageous that the FTC says that 'credit scoring is good for consumers'
when it has a disparate impact on minorities. The FTC appears to believe
minorities aren't 'consumers' worth protecting."
   Buried in the report is the fact that the alleged correlation between
risk and credit-based insurance scores might be explained by other factors.
Instead of pursuing these other factors, the FTC employed subjective and
pejorative racial stereotypes to try to support the alleged link between
credit-based insurance scores and legitimate risk.
   "To add insult to injury, the FTC report mimics the insurance industry
blaming-the-victim psychobabble of claiming credit history is related to
responsibility and risk management. A look at the actual scoring models
shows that socio-economic factors have more impact on the score than loan
payment history and that an insurance credit score has little to do with
personal responsibility and everything to do with economic and racial
status," said Shanna L. Smith, president and CEO of the National Fair
Housing Alliance.
   The group calls on Congress to reject this flawed and biased study and
to tell the FTC to conduct an objective, independent study. In addition,
based on the available evidence of racial discrimination, Congress should
ban the use of insurance credit scoring.
   Center for Economic Justice is a Texas-based non-profit organization
that advocates on behalf of low income and minority consumers on insurance,
credit and utility issues.
   Consumer Federation of America is a nonprofit association of some 300
pro- consumer groups, with a combined membership of 50 million people. CFA
was founded in 1968 to advance consumers' interests through advocacy and
education.
   National Consumer Law Center is a non-profit organization specializing
in consumer issues on behalf of low-income people. NCLC recently released
Credit Scoring and Insurance: Costing Consumers Billions and Perpetuating
the Economic Racial Divide, available at http://www.consumerlaw.org.
   National Fair Housing Alliance is a consortium of more than 220
private, non-profit fair housing organizations, state and local civil
rights groups, and individuals from 37 states and the District of Columbia.
Headquartered in Washington, DC and founded in 1988, NFHA, through
comprehensive education, advocacy and enforcement programs, provides equal
access to housing for millions of people.