Property-casualty groups have voiced strong opposition to legislation introduced in the U.S. House of Representatives to limit the use of credit information by insurers in underwriting and rate-setting.

"Contrary to what the authors of this legislation assert, this bill is not in the best interests of consumers," said Neill Alldredge, vice president for state and regulatory affairs at the National Association of Mutual Insurance Companies. "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 legislation--H.R. 5633, The Non-Discriminatory Use of Consumer Reports and Consumer Information Act of 2008--was introduced by Rep. Luis Gutierrez, D-Ill. The bill has two powerful co-sponsors--House Financial Services Chair Barney Frank, D-Mass., and Rep. Mel Watt., D-N.C., who chairs the Financial Services Subcommittee on Oversight and Investigations.

The legislation 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.

The argument being made by Mr. Alldredge--that credit-based scores have been shown to have predictive value for likelihood of insurance losses--was echoed by virtually every property-casualty group.

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," according to 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," he added.

Among the most controversial of studies looking at the issue was one released last summer by the Federal Trade Commission, mandated as part of the 2003 Fair and Accurate Credit Transactions Act. The study was actually added to that bill via an amendment offered by Rep. Gutierrez.

The report ignited controversy when it was released. Consumer advocates and other opponents of credit scoring 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.

David Sampson, president of the Property Casualty Insurers Association of America, questioned the interpretation of the FTC report by the latest bill's backers. Where the sponsors argue that it found race serving as a proxy in collision, comprehensive and bodily injury auto coverage, 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."

The sponsors of the bill were equally harsh on the insurance industry in announcing the bill, citing what they see as unfair and potentially discriminatory practices.

"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."

In announcing the bill's introduction, Rep. Gutierrez noted that the FTC said in its report that all major auto carriers make use of credit information in one way or another. He also pointed out that 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."

In a related story, the House legislation would likely mean higher premiums for senior citizens, PCI warns in an internal working document.

The PCI working paper, obtained by National Underwriter, which will be used by PCI lobbyists to persuade legislators to oppose the bill, is based on a study on credit scoring issued by the Federal Reserve Board last August.

Based on the Fed study, the PCI paper argues that if consumers with low credit scores pay higher premiums, and consumers with high credit scores pay lower premiums, seniors benefit.

"If not, seniors suffer," the PCI paper said. "The Federal Reserve report demonstrates that older individuals, as a group, tend to have higher credit scores, and that credit-based insurance scores are effective risk predictors."

The PCI paper contends that "the use of credit scores currently benefits seniors--and most insurance buyers--by helping insurers charge premiums based on risk."

Most insurance consumers, including seniors, benefit from insurer use of credit scoring, the PCI paper added.

The paper said a study by the Arkansas Insurance Department last July demonstrated that consideration of credit scores either lowered, or did not affect, premiums for 90.2 percent of auto insurance consumers and 90.8 percent of homeowners' insurance consumers.

"Credit scoring lowered auto insurance rates for more than three times as many consumers than those who saw an increase," the paper said.

With cover art of burning credit card:

Will Subprime Mortgage Crisis Reignite The Insurance Credit Scoring Debate?

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