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Battle over insurance scoring

Marketplace Staff Nov 3, 2006


KAI RYSSDAL: How old are you? Where do you live? Are you married? OK, none of my business, but insurance companies definitely want to know. They use information like that to estimate how likely you are to file a claim. Lately, many of them have added your credit rating to the list. It’s called insurance scoring, and on Tuesday, voters in Oregon will be the first in the nation to decide whether the practice should be banned. From KLCC in Eugene, Ann Dornfeld reports.

ANN DORNFELD: Insurance companies started using consumers’ credit scores to calculate rates a decade ago. In Oregon, the industry has spent millions on campaign ads:

[ TV campaign ad: “Just like teen drivers are riskier than adults, it turns out that people with bad credit are more likely to have a loss than people with good credit.” ]

Insurers that use credit scores say the practice keeps rates low for the 60 to 70 percent of consumers with what they call “good” credit.

But here’s where it gets tricky: Insurance companies don’t just use your standard credit score. Each company looks at different, specific parts of your credit history.

The discount for consumers with good credit is also hard to pinpoint. That’s because each insurance company has its own rate formula. And the formulas are trade secrets.

BILL SIZEMORE: “It’s basically smoke and mirrors, and a way that insurance companies can charge more premiums, and they don’t have to explain why they’re doing it.”

That’s Measure 42 sponsor Bill Sizemore. He wants insurance scoring stopped. Sizemore says the practice picks on poor people, who often have bad credit.

SIZEMORE: “Does it really make sense to say that a person is more likely to get in a wreck because his or her credit is weak?”

Pat McCormick says yes. He’s spokesman for the insurance industry’s “No on 42” campaign.

PAT McCORMICK: “The relationship is just a direct, linear statistical relationship that shows that people who have good credit scores are less apt to file overall insurance claims than those who have poor credit scores.”

His group cites a 2004 Texas Department of Insurance study that found a correlation between credit history and insurance liability.

McCormick says Oregon consumers are already protected by regulations put in place by the 2003 state legislature. Insurers can now only look at customers’ credit when they first apply for a policy. After that they can’t use credit scores to raise rates or cancel policies.

The largest consumer group in the nation recently looked at insurance scoring. Consumers Union senior attorney Norma Garcia led the study into how insurance scoring negatively impacts consumers.

NORMA GARCIA: “We were also looking for positive impact, but couldn’t find one.”

The results were published this summer. They found no clear connection between credit scores and insurance risk.

Garcia says what the insurance industry doesn’t mention is that the same Texas study that linked credit rating and insurance risk also found a link between credit scores and race or ethnicity. It showed that blacks and Hispanics tend to have credit scores far lower than the average white customer.

GARCIA: “Through credit scoring insurance companies can engage in practices that would be otherwise considered illegal. No one is saying that insurance companies are discriminating intentionally, but the impact of using credit scores in insurance results in discrimination that needs to be addressed.”

McCORMICK: “It’s absolutely not true.”

Again, No on 42 spokesman Pat McCormick.

McCORMICK: “If the factor were at all discriminatory, it would be illegal under Oregon law, and Oregon insurance regulators wouldn’t allow its use.”

McCormick says there are options for people with bad credit. They can shop for companies that don’t use credit scores or just not give out their Social Security number.

The industry’s deep pockets have helped kill states’ legislative efforts to ban insurance scoring. Measure 42’s supporters say it’s up to Oregon voters to reverse that trend.

One problem: Insurers have paid nearly $4 million to fight the measure. Its backers have spent nothing.

In Eugene, Oregon, I’m Ann Dornfeld for Marketplace Money.

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