WASHINGTON — The practice of insurers basing auto insurance premiums on a customer's credit rating was questioned at a House hearing yesterday, with critics asking whether it disproportionately hurts young people and minorities.

"This is totally unfair even if there is some statistical relationship," Rep. Mel Watt, D-N.C., was quoted as saying after a hearing Tuesday on the use of credit-based insurance scores. "That might be equivalent to having your driving history determine whether you get a bank loan or the interest rate you will pay on the loan," said Watt, the chairman of the oversight and investigations subcommittee of the House Financial Services Committee.

Insurance industry representatives were quick to defend the practice as sound actuarial policy and an excellent indicator of risk.

Insurers typically give more weight to factors such as an individual's driving record, the type of vehicle they own and the area where the car owner lives, pointed out Robert Hartwig, president of the Insurance Information Institute, Washington, D.C.

Watt's panel heard testimony on a Federal Trade Commission report last summer finding that credit rating scores are effective predictors of the number of claims consumers file, and the costs of those claims.

Although the study found that scores predict both the number of claims that consumers are likely to file, and the total cost of those claims to the insurance company, it is not clear why scores are effective predictors of automobile insurance risk, according to the testimony. The study found that scores do predict risk within racial and ethnic groups, e.g., blacks with higher scores file fewer claims than blacks with lower scores, and that scores have a relatively small effect as a statistical proxy for race and ethnicity. Despite substantial efforts, the testimony noted, the FTC was not able to develop a credit-based insurance score model that effectively predicted risk and narrowed the differences in scores among racial and ethnic minority groups.

Blacks and Hispanics are more likely on average to have lower scores, FTC Commissioner J. Thomas Rosch told the hearing. It "serves as a reminder of the fact that some things even today in our society may adversely affect racial and ethnic minorities."

The FTC said that in models with credit-based insurance scores, blacks were projected to have average predicted risk 10% higher, and Hispanics 4.2% higher, than if the scores were not used.

The report noted insurance companies began to use credit-based insurance scores in the mid-1990s, and that now all major auto insurers use those scores to some capacity.

"Most Americans probably would be surprised that a late payment on their credit cards can dramatically increase the premiums they pay on automobile insurance," said Watt, citing examples of people who saw their rates go up because they had no credit history, or a woman whose insurance premium jumped after her husband declared bankruptcy.

J.P. Schmidt, commissioner of insurance for Hawaii, said his state banned the practice 20 years ago after deciding that it could result in discriminatory practices, and that the benefits were "outweighed by the potential for harm to a greater number of the state's citizens."

Many immigrants and young people have no credit history, resulting in higher risk designations, said Eric Rodriguez of the National Council of La Raza.

Washington state's insurance commissioner, Mike Kreidler, said that five years ago his state passed limitations, such as barring insurers from canceling or refusing to renew policies because of credit ratings. But he said it made him nervous that other factors, such as education and occupation, are starting to creep into insurers' calculations in determining rates.

But Rep. Gary Miller of Califo nia, the top Republican on the panel, said it would be "irresponsible for insurance companies to ignore" the fact that people with bad credit histories are more likely to have accidents. He said he would hate to see the practice banned with the result that people with bad records are subsidized.

Watt also cautioned against federal intervention, noting that states have traditionally regulated insurance and "should continue to do so."

In testimony for the FTC, Commissioner Rosch told the Subcommittee on Oversight and Investigations of the U.S. House Financial Services Committee that the Commission intends to conduct a similar study of the impact of credit-based insurance scores on the availability and affordability of homeowners insurance. He said that to increase public confidence in its homeowner insurance study, the agency intends to use its authority under Section 6(b) of the FTC Act to compel insurance companies to provide homeowners policy information to the Commission.

In conclusion, the Commission's testimony noted that, in addition to conducting research and policy activities to inform the debate about credit-based insurance scores, the Commission also provides consumers with critical information so they can make better-informed decisions. To help them make these decisions, the agency recently revised and reissued its English- and Spanish-language consumer education materials to provide greater emphasis to the link between credit history and insurance premiums.

Sources: Associated Press, Pioneer Press, Federal Trade Commission

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