Consumer Credit

WASHINGTON (May 21, 2008) - Consumers benefit when insurance companies  use credit-based insurance scoring in underwriting and rating policies. That's the message the National Association of Mutual Insurance ompanies (NAMIC) will deliver to a congressional panel examining nsurers' use of credit-based insurance scoring today.

The House Financial Services' Subcommittee on Oversight and Investigations' hearing today is the second on the issue.

"Every serious study of the issue has reached the same findings - there is a strong correlation between credit information and the probability of a loss," NAMIC said in its written testimony. "The same studies demonstrated that the use of credit enhanced the fairness of insurance
underwriting by allowing insurers to offer coverage to more consumers, more accurately price policies, and actually lower costs for the majority of insurance consumers."

NAMIC pointed out that credit-based insurance scoring is not the sole criteria in insurance underwriting when determining risk-based pricing. Also considered are other important factors, such as driving record, age and type of vehicle, and where the vehicle is garaged, that enable
insurers to make more accurate, objective, consistent, and timely underwriting and pricing decisions.

"Banning or limiting the use of any underwriting or rating factor which is known to be predictive of insurance losses leads to decreased coverage availability and higher insurance prices. History is littered with examples of how limitations on rating by geography, age of driver,
or other factors have destroyed competitive markets and driven up prices. A ban on the use of insurance scores would be counterproductive and would harm, rather than benefit, consumers," NAMIC said.

An insurance company's ability to more accurately predict losses is a critical component in accurately underwriting risks, and benefits consumers with lower rates and more choices, NAMIC said. 

"The goal of insurance underwriting is to correlate rates for insurance policies as closely as possible with the actual cost of claims," NAMIC said. "Effective underwriting allows insurers to operate profitably and compete in the marketplace.  Likewise appropriate underwriting ensures
that consumers benefit by not subsidizing other policyholders who pose worse insurance risks, resulting in inappropriate cross-subsidization."

In response to concerns that insurers' use of credit-based insurance scoring unfairly discriminates against certain population groups, NAMIC pointed out that every empirical study has concluded that insurance scoring is neutral on its face with respect to race, ethnicity, and
income, and is applied neutrally. The use of insurance scoring is not motivated by a desire to discriminate based on race, ethnicity, or income, nor do insurers collect or use this information.

"As a result, it is inappropriate to ban a fair and effective underwriting tool that benefits the majority of insurance consumers.  Congress should acknowledge and respect the actions of the states in effectively regulating the business of insurance, including the use of
credit-based insurance scores," NAMIC said.

For further information, contact
Nancy Grover
(202) 628-1558 Tel
(561) 704-9066 Cell
(202) 628-1601 Fax
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For Release:July 24, 2007

The Federal Trade Commission today released a report presenting the results of a study concerning  credit-based insurance scores and automobile insurance. The study found that these scores are effective predictors of the claims that consumers will file. It also determined that, as a group, African-Americans and Hispanics tend to have lower scores than non-Hispanic whites and Asians.

Therefore, the use of scores likely leads to African-Americans and Hispanics paying relatively more for automobile insurance than non-Hispanic whites and Asians.

Credit-based insurance scores are calculated based on a consumer's credit history information. Insurance companies use them to predict the claims that consumers are likely to file, and to etermine the premiums they are charged.

As directed by the Fair and Accurate Credit Transactions Act, the Commission evaluated how scores  are developed and used; and, in the context of automobile insurance, the relationship between scores and risk and the possible causes of the relationship; the effect of scores on the price and availability of insurance; the impact of scores on racial and ethnic minority groups and on income groups; and whether other scoring models could be created that predict risk as well as
current models and narrow the differences in scores among racial, ethnic, and other groups of consumers.

In its evaluation, the Commission considered prior research, nearly 200 comments submitted in  response to requests for the public's views, discussions with interested parties, and its own research using an extensive database of automobile insurance policies and other information about consumers. Among the study's findings are the following:

*    Scores effectively predict the number of claims consumers file and the total cost of those claims. Their use is likely to make the price of insurance better match the risk of loss that consumers pose. Thus, on average, as a result of the use of scores, higher-risk consumers  pay higher premiums and lower-risk consumers pay lower premiums.

*    Use of scores may result in benefits for consumers. For example, scores permit insurers  to evaluate risk with greater accuracy, which may make them more willing to offer insurance to higher-risk consumers for whom they otherwise would not be able to determine an appropriate premium. Scores also may allow insurers to grant and price coverage more efficiently, producing cost savings that could result in lower premiums. Little empirical data was submitted or  available to the FTC that would allow the agency to quantify the magnitude of these benefits.

*    Scores are distributed differently among racial and ethnic groups, and these differences  are likely to have an effect on the premiums that these groups pay, on average.

*    As a proxy for race and ethnicity in statistical models of insurance, scores have a 1.1 percent and 0.7 percent effect for African-Americans and Hispanics, respectively. This means that  most of their predictive power is not as a substitute for membership in racial or ethnic groups.  In addition, scores effectively predict risk of claims within racial and ethnic groups.

*    The Commission could not develop an alternative scoring model that would continue to predict risk effectively, yet decrease the differences in scores among racial and ethnic groups.  The results of these efforts indicate that there is no readily available alternative scoring model that would achieve those results.

The Commission vote to issue the report was 4-1, with a statement by Chairman Deborah Platt Majoras, Commissioner William E. Kovacic, and Commissioner J. Thomas Rosch, a concurring  statement by Commissioner Jon Leibowitz, and a dissenting statement by Commissioner Pamela Jones  Harbour.

The report and statements from commissioners are available from this link: 

http://www.ftc.gov/os/2007/07/index.shtm#24

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