Income vs. Insurance Credit Scores

The Virginia Bureau of Insurance Report

This is the report cited most by the industry as proof that insurance scores are not discriminatory to lower income insurance consumers:

This analysis is comprised of a file (provided by Fair, Isaac). The file contained the average credit score by zip code for Virginia zip codes containing more than 100 credit scores in the Trans Union database. "There were 956 zip codes meeting this minimum number of credit score criteria. The average credit score for these zip codes was 701, with a median score of 702 and a minimum and maximum of 603 and 757 respectively. The Bureau matched average credit score by zip code to the 1989 Federal Census demographic data by zip code and performed various regression analysis to determine if credit
scores could be used to determine a person's income or race."

"The bureau analyzed the relationship between credit scores and income as well as the relationship between credit scores and race. Neither Fair Isaac nor Trans-Union collects data on income or race, thus requiring the bureau to obtain this information from the 1989 Federal Census. Although, it did
not provide a one-to-one match, this did not preclude the Bureau from analyzing whether correlations exist. Thus, average credit scores, median household incomes, and racial make-up by zip code were analyzed to obtain a general indication of correlation. Nothing in this analysis leads the Bureau
to the conclusion that income or race alone is a reliable predictor of credit scores."

Does this convince you? Note that this was an analysis, not a study. This analysis was done with "insurance" credit scores.

There is additional research cited in Virginia's findings that the insurance industry failed to include.

The following research is done with "creditworthy" credit scores.

This research was conducted by the Federal Home Loan Mortgage Corporation (Freddie Mac) and five of the nations Historically Black Colleges and Universities. They found that:

1. Having poor credit is a common problem in today's society.
2. Credit problems extend across income groups and are not unique to low-income borrowers.
3. Minority borrowers are more likely than white borrowers to experience credit problems.

Furthermore, according to a report released by The Fair Housing Council of Greater Washington:

"It is highly probable that credit scoring has a disparate impact on protected classes which creates barriers to having access to equitable insurance products."

and the Federal National Mortgage Association (Fannie Mae), stated in an advisory:

"Mortgage lenders were told to look at the factors which caused a bad credit score and not automatically disqualify someone simply due to a "below average" credit score."

The Virginia report  goes on to explain that:

"Based in the Bureau's findings, there APPEARS to be concrete data that a correlation exists between credit scores and losses. From this purely, statistical perspective, therefore, the Bureau is unable to make a recommendation prohibiting the use of credit scores in the underwriting process. However, the Bureau has concerns about the long-term effect that the use of credit scores may have on Virginia consumers. As the number of insurers that use credit history as an underwriting tool increases, there may be an increase in the number of consumers that will be refused coverage, cancelled, non-renewed, or charged higher premiums due to their adverse credit history. Conversely, industry advocates of this practice argue that there may be an increase in the number of consumers that will obtain coverage at lower rates due to their good credit history.

As suggested in the white paper prepared by the National Association of Insurance Commissioners, the Bureau recommends that the insurance industry take steps to educate consumers about the use of credit scores in the underwriting process. If the Bureau finds that over time a significantly greater number of companies are refusing to issue of refusing to renew coverage solely on the basis of an adverse credit history, the Bureau will consider proposing legislation to prohibit this practice"

Guess which part the insurance industry fails to include when citing this reference?!

Virginia responded to the use of their findings by the industry:

"Virginia regulators also expressed disappointment with how their report to the legislature was characterized. The report found a correlation between credit and claims but found no causal relationship. In addition, while the report offered no evidence of redlining under Virginia law, the insurance department "continues to monitor" how CBUP (credit based underwriting and pricing) impacts policyholders in its jurisdiction."

"Representatives of both departments called the NAII characterization of their reports "overstated." Virginia regulators stressed that the data reviewed for their study were prepared and provided by the insurers and should not be used to extrapolate national conditions." See complete article.

Maryland Department of Insurance Findings

This information is compiled in the Maryland Insurance Department's Use of Credit History by Insurers by Steve B. Larsen in 2002.

These numbers speak for themselves.

The Washington Study

One of the most interesting observations within the Washington study:

"At the request of the NAIC, the Academy of Actuaries has evaluated four studies on insurance credit scoring. The concluded that these studies do not directly address of whether this practice has a disparate impact on people of color/and or the poor. This is significant because the insurance companies have cited these studies as evidence that insurance credit scoring does not have a disparate impact. "Effects of Credit Scoring on Auto Insurance Underwriting and Pricing", State of Washington, Office of Insurance Commissioner.

Mike Kreidler, Washington Insurance Commissioner - Press Release

"Income also was found to be a significant factor. The study found that as incomes rise, credit scores improve and premiums go down. Credit scoring raised the average costs for poor policyholders relative to affluent policyholders."

"The intent of the study was not to single out a particular company, but to see if industry-wide use of credit scoring in auto insurance results in discrimination against the poor or people of color," stated Insurance Commissioner Mike Kreidler. "It's clear that interesting questions have been raised that warrant further investigation."

It appears that more studies regarding income vs. insurance scores are warranted. Why should it be up to the consumer to prove this is a discriminatory and unfair practice? The insurance companies have plenty of money to prove that it is not, why then do they resist further studies?

The Insurance Associations ,(AAI, AIA, NAII, NAMIC), have no interest in further studies, they state in their latest joint paper to the NAIC: (prior to the Washington Study)

"Should the working group determine that a new study is warranted, the study
should determine the correlation between credit based insurance scores and
loss ratio. Such a study would be the only truly objective and meaningful
way of measuring whether or not credit scoring remains a relevant factor to
premiums charged."

The same question comes to mind. Whoever thought claims and credit would correlate and why? Was the old rating method not profitable? Did basing rates on claims history and driving history cause the insurance companies to lose money. It appears this is not the case.

Reported May 1, 2000 in the Detroit News (Michigan):

"Nationally, claim costs are down about 3 percent to 4 percent over the past year. In part, rates are falling because Americans are grayer, balder, fatter and better drivers. As baby boomers age, they crash less. "We have a big lump of suddenly safe drivers," Hunter says.   There are other reasons, too. Cars are safer and air bags are cutting injuries, drunk driving is down. Some states also have tightened licensing rules designed to keep uninsured drivers off the road, which also may have helped.  All that means rates are falling for young and old"

Then it goes on to say:

"Avoiding tickets and accidents is the best way to hold down auto insurance rates. But there are other ways too. For instance, pay your bills. More insurers are using your credit scores to set your auto insurance rate. "It's becoming the new trend.""

So why do they need this new factor? As one consumer put it in a recent email:

"This is arbitrary (at best) and consumer gouging (at worst.)"