Rep. Luis Gutierrez, D-Ill., introduced legislation today designed to limit the ability of insurers to use consumer credit ratings and information in setting rates or deciding to offer coverage.

“Insurance companies are increasingly and alarmingly using credit information contained in credit reports to determine whether and at what price to offer personal lines of property and casualty insurance,” said Rep. Gutierrez. “This includes automobile and homeowners insurance. For families who are only beginning to establish credit–including minority and immigrant communities–this practice puts them in a difficult and unfair financial position.”

The legislation, known as the Non-Discriminatory Use of Consumer Reports and Consumer Information Act of 2008 (HR 5633), is being co-sponsored by House Financial Services Committee Chairman Barney Frank, D-Mass., and Rep. Mel Watt., D-N.C., who chairs the Financial Services Subcommittee on Oversight and Investigations.

The bill, according to Rep. Gutierrez, would bar the use of credit information where there is a government finding of discrimination based on that use, or if the credit information serves as a proxy for race or ethnicity.

In announcing the bill's introduction, Rep. Gutierrez noted that the Federal Trade Commission has said that all major automobile carriers make use of credit information in one way or another. An FTC report issued in July of last year found that credit-based insurance scores can be an effective predictor of risk. It found minorities tend to have lower credit-based scores and often end up paying more for their coverage.

“The insurance industry has been increasingly using credit information to underwrite and rate personal lines of insurance,” said Rep. Watt. “Government studies have shown that credit scores correlate with race or ethnicity, so minorities often end up paying more for personal lines of insurance even when they are safe drivers or have never filed claims.”

Insurance groups have maintained that credit scores are effective predictors of loss, and point to studies showing as much. They also point out that the majority of consumers affected by their credit scores receive a benefit, typically a discount, for having high credit scores.

“Credit scoring has helped improve auto and homeowners markets. Most consumers are helped by it and it is already regulated effectively. So we see that this bill would not be beneficial,” said David Snyder, assistant general counsel for the American Insurance Association. “Numerous federal and state studies have documented the value of credit scoring in personal lines of insurance.”

David Sampson, president of the Property Casualty Insurers Association of America (PCI), questioned the Congressmen's interpretation of the FTC report.

Where the bill's sponsors argue that it found race serving as a proxy in collision, comprehensive and bodily injury coverage, the PCI said the report found credit-based scores had little effect as a proxy in such a role.

“Using this information allows for more accurate pricing and saves many consumers money on their automobile and homeowners' insurance policies,” Mr. Sampson said. “Consumers expect to pay a fair price for their insurance that matches their individual risk. Insurers simply want to use the most accurate, statistically valid tools available to achieve that goal. Credit information has proven to be one of the most accurate methods of predicting losses.”

Neill Alldredge, vice president for state and regulatory affairs for the National Association of Mutual Insurance Companies, echoed that sentiment.

“Contrary to what the authors of this legislation assert, this bill is not in the best interests of consumers,” he said. “Study after study has shown credit-based insurance scores are an accurate predictor of future claims that enable insurers to offer coverage to more consumers at a fair price.”

The FTC report cited by both sides in the issue was mandated by the Fair and Accurate Credit Transactions Act signed into law in 2003. The report ignited controversy when it was released. Consumer advocates and others questioned its findings, which were based on information voluntarily provided by insurers, and one FTC member filed a dissent over the methodology used in crafting it.