A battle is waging in Massachusetts over the use of credit scores to determine auto insurance rates.
The Massachusetts Association of Insurance Agents, or MAIA, is getting ready to go door-to-door, so to speak, to gather enough voter signatures to place the possible ban of the practice on the state ballot next year. The petition also includes banning the use of education and occupation in rating a consumer's auto insurance policy.
Already, Massachusetts has strict regulations on the use of credit scores for insurance purposes, as does California, Hawaii and Maryland.
But aside from those states, all others allow car, homeowner and property insurers to use some type of credit-based insurance score to determine how likely a consumer will file a claim, according to David Snyder, vice president and associate general counsel of the American Insurance Association. (To find out more, check out my article explaining credit-based insurance scores.)
FICO, TransUnion and LexisNexis are among the top providers of this kind of credit score.
The scores take into account the same credit information that traditional credit scores use, except the data are weighted differently.
For example, payment history in a FICO credit-based insurance score makes up 40 percent of the score, versus only 35 percent in the company's regular credit score. Mix of credit only contributes 5 percent to FICO's credit-based insurance score, compared with 10 percent in its credit score.
And TransUnion's insurance scores tilt toward age of credit accounts and stability, according to Clifton O'Neal, the company's spokesman.
But critics find the use of credit-based insurance scores to be unfair in some circumstances. That's the crux of the Massachusetts ban.
"This important consumer legislation will help protect the state's auto insurance-buying public from rating practices that, we believe, would be unfair, discriminatory and unreliable," says the Massachusetts Association of Insurance Agents on its website.
The watchdog group Demos put out a paper this summer, offering evidence that credit-based insurance scores hurt lower-income people more because they are more likely to have lower scores.
"We don't want to charge people more for things because they have lower credit scores," Amy Traub, a senior policy analyst at Demos, told Bankrate after the paper was published. "That's not the way we should want to operate as a society."
It remains to be seen if Massachusetts residents agree. The credit scoring bill will be considered by the state's committee on financial services Oct. 18.
How do you feel about insurers using credit-based scores to determine your premiums?
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