Credit Scores: Credit-Based Insurance Scores

Summary

An insurance score, a type of credit score, is a number produced by a computer scoring model

that

analyzes a person's credit information (i.e., payment history, collections, balances, and bankruptcies)

obtained principally from that person's credit reports. Increasingly, insurers have been using

insurance scores as an underwriting factor to evaluate insurance applications, especially for

automobile and homeowners insurance, in predicting possible future insurance claims an applicant

might generate. Insurers maintain that there is a clear statistical connection between a person's

insurance score and the likelihood of that person filing claims, as well as how expensive such claims

might be. By using insurance scores, insurers say that they are able to charge lower premiums to

most customers who are better risks. On the other hand, some consumer advocates dispute the

insurers' position and argue that the use of insurance scores has a disparate effect on minorities, and

is merely a new method by which insurers can increase premium rates.

Even though credit scores have been widely used for some time by credit-related businesses

such as home mortgage lenders and credit card issuers, the use of insurance scores by insurers is

relatively new. The growing discontent regarding the use of credit-based scoring has been reflected

in proposed legislation amending the Fair Credit Reporting Act to require additional consumer

protections, and in increased litigation. Insurance scores, like other credit scores based on credit

reports, are regulated to some degree at the federal level. Unlike other credit scores, however,

insurance scores used in the underwriting process are also subject to state insurance laws and

regulations. Most of the states have been active in recently reviewing their laws and regulations in

this area. Federal legislation in the 108th Congress that would have affected insurance scoring

included H.R. 1473 , H.R. 2796 , H.R. 2622 , and

S. 1753 . The latter two were the House and Senate versions of what would become P.L.

108-159 , which mandated a study on the impact of insurance scoring. This report will be updated

in the event of significant legislative or regulatory developments.