Monday, September 25, 2006
Consumers Union, the nonprofit publisher of Consumer Reports, announced its support today for Measure 42, the Oregon ballot measure that bars insurers from using a customer’s credit score to set insurance premiums. The consumer group supports Measure 42 because credit scores are often based on inaccurate information and it is unfair to use them to price insurance. Studies show that the use of credit scores for insurance has a disproportionately negative impact on low income and minority families.
“It’s not fair that consumers with spotless driving records or those who have never even filed a homeowners insurance claim can be penalized with higher premiums just because of their credit score,” said Norma Garcia, Senior Staff Attorney with Consumers Union. “Insurance premiums should be based on the risk of an accident, not a consumer’s bill paying record for other goods and services. Measure 42 will help make the insurance market more fair for all Oregonians.”
Beginning in 2004, Oregon law barred insurers from using credit scores to set premiums or cancel policies for existing customers. Measure 42 expands this protection by prohibiting insurers from using credit scores or credit worthiness to set premiums for new customers. The measure applies to medical, health, accident, automobile, fire and liability insurance.
The insurance industry has argued that drivers with low credit scores are more likely to get into an accident even though there is no evidence to support such a claim. Insurance companies also maintain that there is a correlation between a low credit score and a higher chance of filing a future claim, but Consumers Union does not believe that justifies the practice.
“There is no proven connection between credit status and getting into a car accident, having a home fire, or experiencing some other kind of loss,” said Garcia. “It’s simply unfair for insurers to charge consumers more up front just because of the possibility they might use their policy at some point in the future. Credit scores shouldn’t be a factor when it comes to pricing insurance.”
Insurance companies have kept their scoring formulas secret, preventing an independent, public review of the actuarial soundness of their scoring models. There is no single mathematical model for how insurers use credit information to influence insurance decisions or for how they derive insurance scores from credit information. It’s hard for consumers to gauge what they can do differently to increase an insurance score, or even to know what factors are viewed more favorably by different insurers.
Using credit scores to price insurance also is problematic for consumers since the score is derived from information from credit reports, which may not be completely accurate. A 2002 study by the Consumer Federation of America estimated that tens of millions of Americans are unfairly penalized for incorrect information in their credit reports. More recently, a 2004 study by the U.S. Public Interest Research Group found that one in four credit reports contained errors serious enough to cause consumers to be denied credit, housing, or even a job.
“Insurance companies insist that credit scores are a reliable predictor of future claims and yet they have no idea whether the credit information they are using is accurate,” said Garcia. “Too many credit reports contain serious errors. This can result in a lower insurance score and higher premiums. Even those consumers with good credit may have a lower than expected insurance score because of the peculiar ways insurance companies weigh credit behavior.”
Unfortunately, when credit scores are used to underwrite and price insurance policies, low income and minority communities are disproportionately penalized. A 2004 study by the Texas Department of Insurance found that “in general, the average and median credit scores tend to get better as income level rises.” The study in Texas also found that Blacks have an average credit score that is roughly 10-35 percent worse than the credit scores for Whites. Hispanics have an average credit score that is roughly 5 to 25 percent worse than for those for Whites. Average credit scores for Asians in this study are about the same or slightly worse than for Whites.
“While insurance companies may not intend to discriminate, the result is the same,” said Garcia. “Basing insurance premiums on credit scores means low income and minority consumers are forced to pay higher rates than others with the same driving record or claims history.”
Norma Garcia or Michael McCauley: 415-431-6747