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Mass. war over insurance scores

By Janna Herron · Bankrate.com
Friday, October 7, 2011
Posted: 1 pm ET

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?

Follow me on Twitter: @JannaHerron

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4 Comments
OmegaSD
October 10, 2011 at 12:05 pm

(Disclosure: I work for one of the 3 major credit bureaus, so that probably biases my view a bit; but what follows are my own opinions, both as someone in the industry and a consumer, and do not necessarily reflect the views of my employer).

I couldn't disagree with the following two quotes more:

-- "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.

-- "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."

I understand the need to protect lower-income people; I would even agree we wouldn't want to "build up the rich on the backs of the poor," so to speak. But people that complain about scores like these discriminating against lower-incomes know very little about the way these instruments work...which is reflected by the lower credit scores. Having been a credit analyst for 5 years, I've seen over and over that people with lower scores tend to get there by poor management and understanding of the products they purchase, not because they make less money than others.

Firstly, income is not a component of most credit scores that I'm aware of (at least not generic ones like FICO or Vantage or even insurance scores). Someone making $25k/yr can easily have a much higher credit score than someone making $100k/yr. Scores reflect money management, not the amount of money someone has. "Not how we want to operate as a society?" No, that IS how we want to operate...if someone proves they haven't managed finances well in the past, they are penalized, but they also have the chance to improve over time, so the penalties become less. Secondly, with regards to insurance, it has been statistically proven over and over that people with lower scores are more likely to file claims, generally because they have less resources. If that is the case, there are only a few options for the insurer:
1. Deny coverage so that pay-outs are less than revenue-in.
2. Accept coverage but charging higher rates for the highest financial risk.
3. Accept coverage and charge everyone the same.

You tell me which of those is the fairest for consumers as a whole? Why should I be charged more because of someone else's high-risk? Again, I feel for those who feel discriminated against, but if laws like these go through, it makes it worse for those of us who have done everything we can to play by the rules.

Let's be clear, insurers are not going to be in business if they don't believe they can make money; it's not a charity. That said, I think the right amount of legislation is in place to make sure there isn't undue discrimination (in fact, while creditors cannot discriminate on gender and age, insurers CAN because it's statistically (i.e. indiscriminately) proven that those two strongly separate low- and high-risk behaviors).