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Controversy swirls over whether insurers should use credit scoring in pricing policies by reactions magazine, december 2003 the practice of using a person's credit history to determine their insurance premium is causing controversy in the us, consumer groups say it amounts to discrimination; insurers say it is a reliable method of determining how likely someone is to file a claim, russ banham reports, consumer groups blast it as anti-consumer, insurance.

Companies insist it is pro-consumer, the "it" in question is credit scoring: the use of a person's credit history by insurers to underwrite personal lines motor.

And homeowners insurance, the contentious practice is this decade's redlining controversy, pitting critical consumer advocates against vehement insurance executives in a no-holds-barred battle, and the battle is raging fiercely, robert hunter, a former federal insurance administrator and texas insurance regulator, and now the director of insurance at the consumer federation of america, says credit scoring is a.

Sophisticated way for the personal lines insurance industry to avoid selling insurance to low-income ethnic minorities, "the industry has redlined for decades," hunter says, "why stop now, especially if you can find a way to do it that doesn't look like you're doing it?" redlining refers to some insurers' practices in the 1970s of basing.

Insurance rates on postal codes, it is alleged that some companies charged people from ethnic minorities who lived in certain postal districts more for insurance than people who.

Lived in other areas, or they simply did not offer insurance in these places at all, the name comes from the fact that insurers would effectively draw a red line around a particular area and either refuse to write there or charge residents higher prices than elsewhere, it.

Is now illegal for insurers to redline, but hunter claims that credit scoring is a way of getting around All 50 States Insurance the law, "the industry redlines because it believes that hispanics and.

Blacks cause more claims," he says, "it's no different than the days of segregated bathrooms, this is just segregated insurance," the insurance industry denies this, it points out that credit scoring does not take into account a person's race or income, insurers contend that a person's bill-paying history is a reliable indicator of.

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His or her propensity to file a claim and they cite several studies supporting this correlation, moreover, they assert that credit scoring ensures fair underwriting treatment of all insurance policy applicants, "without credit-based insurance scores, good drivers will subsidise.

Bad drivers when it comes to buying car insurance," says robert hartwig, chief economist at the insurance information institute in new york, "the truth is.

That credit scores are highly accurate predictors of future loss in auto and homeowners insurance, without it, millions of individuals who are good risks will pay more for insurance than they should," arizona free home insurance owner quote the tempest.

Many consumers and agents have complained of policies being cancelled or not being renewed by insurers for credit reasons alone, they say insurers have also been unwilling to explain their decision and, in some cases, the decision has been based on inaccurate or inferior credit information, the legislation.

Is said to address these concerns in a number of ways, it will require insurers to provide an explanation when cover is cancelled or not renewed because of the applicant's credit score, insurers will have to submit their credit.

Scoring methods to state insurance regulators for approval, and All 50 States Insurance insurers will have to re- underwrite and alter the rate charged on policies where the holder's credit report has been updated or amended by credit bureaus, the bill will also prohibit insurers from using credit information as the.

Sole basis for underwriting, a practice said to have been adopted by a few carriers, "this legislation responds to the complaints made by independent agents and consumers," says dave snyder, vice- president and assistant general counsel at the american insurance association, "there are no black boxes any more with respect to how these scores were devised, insurance regulators now have complete access to the same information that insurers.

Use to develop a score," the legislation has been passed in its entirety by a dozen states, another dozen have passed a version of the bill, tweaking different aspects to suit their local markets, the rest of the states are still considering the legislation, "the bill, or at least a reasonable facsimile, is becoming the.

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Standard in many states, governing the use of credit information for insurance purposes," says hartwig, "those states that don't allow it, such as maryland, are suffering the consequences," maryland is the only state to have banned the use of credit.

Scoring, hartwig says maryland homeowners with the best credit scores pay between 20% and 40% more for their homeowners insurance than similar people in other states, "is that fair?" he asks, "maybe to the.

Poorer risks who are getting a All 50 States Insurance good deal on their insurance because the better risks in the state are subsidising them by paying more for their homeowners insurance," hunter says he has heard these arguments before and questions the motivation behind the bill proposed.

By ncoil, "the truth is that ncoil is an organisation made up mostly of insurance executives," he says, "what else are they going to promote but a pro-insurer bill? this bill does nothing, it just obscures the truth, and the truth is that credit scoring is wrong, it's discriminatory and must be banned.

In all states, period," logical connections hartwig sides with the insurers, however, and argues there is a link, he also tries to explain it, "no logical connection?" he says, "come.

On, it should not home owner insurance quote arizona be surprising that people who are responsible and prudent in one area of their lives, areas that we can objectively and quantifiably measure via their use.

Of credit, demonstrate responsibility and prudence in other areas of their lives, "there are very few individuals who are absolutely meticulous with respect to many important areas of their lives and.

Are reckless maniacs behind the wheel, credit scores are a measurement of a person's responsibility traits and this has value for obtaining a loan or for insurance, the bottom line is that the relationship between credit standing and relatively low [loss] ratios is statistically irrefutable," a study by the university of texas's bureau of business research, released in march.

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Affirms a statistical connection between a person's credit habits and the likelihood they will file an insurance claim, the study shows that those with the poorest credit scores generated almost twice the losses on motor insurance policies than those with the best scores, another insurance industry-sponsored study, released in june by epic actuaries, analysed 2,7m auto insurance policies, it also concluded that credit and insurance losses are "unquestionably correlated".

The study called credit-based insurance scores "one of the most valuable tools" insurers have for the accurate rating and pricing of auto insurance, "the study found an extremely high correlation between credit and claims frequency," says snyder at the aia, "for example, people with the worst insurance-based credit scores were 30% more likely to have had filed a claim, those with the best.

Scores were about 20% less likely to have a claim filed, in some states, such as new york, All 50 States Insurance the correlation is dramatically higher, in new york, a person with the worst credit score is 60% more likely to file a.

Claim," and others in the industry agree that the correlation is indisputable, "credit is definitely a good predictor of risk," says nicole allen, director of government affairs at fireman's fund insurance company in novato, california, "these studies show the correlation from.

A statistical perspective, the correlation is there and cannot be denied," but hunter says a statistical correlation is not enough, "twenty years ago, the california department of motor vehicles did a study that discovered a connection between a person's driving record and hair colour," he says, "does that mean that hair colour should be a determinant of insurability or an insurance rate? of course not, you need to start with a thesis.

Such as: 'young men with testosterone tend to drive faster than the rest of us, so do they cause more accidents?' then you look at the data, you don't start with data and say: 'hey look, i found something,' you need some intuitive logic first," "no you don't," counters hartwig, "actuarial science requires correlation not causation, that's the law, and hunter, who is arizona home owner insurance.

Rate an actuary, should know that, a 16 year-old male is charged more for auto insurance than a 40 year-old female because correlation analyses show he is far more likely to be involved in an accident, you don't need a thesis analysing the differences between 16 year-old men and 40 year-old women before you dig into the data," tossing.

Brickbats but allen at fireman's fund denies this, "credit-based insurance scores are colour-blind," she says, "credit reports contain no information on race, ethnicity, religion or marital status, and the ncoil model bill expressly prohibits insurers from using any insurance score that is calculated using income.

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Gender, addresses or zip codes, ethnicity, religion, marital status or nationality, credit is simply credit, and it is a reliable indicator of a person's potential for causing insured loss," other.

Insurance executives back allen up, "our objective is to price insurance policies as accurately as possible, which helps us make an underwriting profit and grow," says thomas hollyer, agency product development manager at progressive insurance companies in cleveland, ohio, "we do not use credit to cancel, non-renew or decline offering insurance to anybody, when we look at credit, we're looking at bill-.

Paying behavior, we don't have any information, and i mean any, on a person's race, income or disability," snyder at aia describes hunter's allegations as inflammatory, he says they stem from the politics of consumer groups that campaigned against some previous underwriting systems that relied heavily on broad classifications such as territory and age, but he says he cannot understand how basing premiums on credit scores is deemed anti-consumer.

"the industry was criticised then because we weren't being individualised enough in our underwriting, now we apply something extremely All 50 States Insurance individual like credit on top of other criteria, which we believe will have a beneficial impact on people who would otherwise pay more.

For insurance, something that the groups should applaud, and they criticise it, we now have companies offering 12 different pricing tiers, in part because of information that is available on credit, one has to argue this is in the obvious.

Interest of consumers," and hartwig agrees, "if hunter gets what he wants, the banning of credit information for insurance purposes, good drivers and responsible homeowners will be forced to subsidise those with poor loss histories by hundreds of millions of dollars each year, now that's a statistical correlation, meanwhile, the incentive to drive safely will decrease, as will the incentives to properly maintain one's cars and homes," hunter, however, who has worked.

For consumer movements for four decades, isn't budging, "there are only three reliable and fair indicators of a person's insurability in an automobile insurance context: driving record, the number of years of driving experience and the number of miles driven," he.

Says, "the rest are meaningless,".