Long-Awaited Credit-Based Insurance Scoring Report Settles Little

By Chris Grier
BestWire Services

When the Federal Trade Commission released its long-awaited study on the use of credit-based insurance scoring in underwriting automobile insurance, insurers were probably hoping that would be the end of the matter.

Judging from the reaction the report has received so far, that seems unlikely. One of the FTC's own commissioners has disowned the study, issuing a detailed critique of its shortcomings, and several civil-rights and consumer advocacy groups have outright condemned it.

The 2003 law that mandated the study was passed when Congress was firmly under Republican control. That's no longer the case, and Democrats have made it clear they are inclined to look into the issue. House Financial Services Committee Chairman Barney Frank, D-Mass., has weighed in often about consumer protection issues, and Rep. Melvin Watt, D-N.C. -- who has voiced serious misgivings about the way the report was conducted -- held a hearing of that panel's oversight and investigations subcommittee on July 27 to look further into the FTC report and its research methodology.

The report itself was mandated by the 2003 Fair and Accurate Credit Transactions Act, which said the FTC must conduct "a rigorous and empirically sound statistical analysis of the relationship between scores and membership in racial, ethnic, and other protected classes." The FACT Act also requires an analysis of whether another scoring model could be used that could predict risk while resulting in smaller scoring differences based on race, ethnicity, and other protected factors.

Even some critics of insurance scoring concede that there's a correlation between a person's credit and the likelihood of filing a costly claim. Insurers say the practice leads to fairer pricing: Those who present less risk pay less, and those who present a greater risk pay more. Yet it's an open question as to how "rigorous and empirically sound" the study was.

The amount of effort the FTC put into the credit-scoring study is markedly different from the amount of effort it put into other recent studies it has undertaken. In a probe of gasoline price hikes following Hurricane Katrina, the agency used its so-called Section 6(b) powers to compel documents from the oil industry; in two other recent studies, of the pharmacy benefit-management and generic drug sectors, the FTC subpoenaed documents and information from dozens of industry participants.

The FTC did not use its Section 6(b) powers or issue subpoenas to compel the production of any documents or data when conducting the credit-scoring study. Instead, it based its study on information volunteered by five insurance companies, with no assurance from them that the data were accurate or authentic.

There are a couple of things to watch for. One is whether Congress will take up legislation to address the use of insurance scoring. The other is whether the FTC will use different methods when undertaking the second half of its mandate under the FACT Act -- an analysis of the impact of credit-scoring in homeowners insurance, which the agency said it expects to deliver to Congress in early 2008.

Source: BestWire Services (www.ambest.com)

From: Insurance News Net (www.insurancenewsnet.com)