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N.C.’s Rep. Watt leads debate in Congress against credit scoring

The latest skirmish in the battle between politicians who want to eliminate insurance-based credit scoring and insurers that say they need it to do their job unfolded in a congressional hearing earlier this month, with a North Carolina officials leading the debate.

While insurers have relied on credit scoring as one of several factors in setting personal lines insurance rates, U.S. Rep. Melvin L. Watt, D-N.C., chairman of the Subcommittee on Oversight and Investigations, questions the industry’s logic.

“One’s credit history, not one’s driving history, is likely to be determinative of the cost of one’s automobile insurance,” Watt said in response to a Federal Trade Commission report on the subject released in July. “That would be equivalent to having your driving history determine whether you get a bank loan or the interest rate you will pay on the loan. The question we need to address is whether this is fair?”

Watt held a congressional hearing on Oct. 2, to review the FTC report, “Credit-Based Insurance Scores: Impacts on Consumers of Automobile Insurance.” Watt said the report raises serious concerns about the impact of the growing use of credit-based insurance scores and whether they are a proxy for minorities.

According to the FTC, credit-based insurance scores typically are calculated using information about past delinquencies and information on the public record, such as bankruptcy; how close a consumer is to his or her credit limits; evidence of seeking new credit; the length and age of the credit history; and the use of certain types of credit.

The FTC said its study found that scores predict risk within racial and ethnic groups, e.g., African-Americans with higher scores file fewer claims than African-Americans with lower scores, and that scores have a relatively small effect as a proxy for race and ethnicity.

Despite its efforts, the FTC said it was not able to develop a credit-based insurance score model that effectively predicted risk and narrowed the differences in scores among racial and ethnic minority groups.

Bob Byrd, executive director of the Independent Insurance Agents of North Carolina, said credit scoring is just one of the tools used by underwriters to determine a rate base. He said if credit scoring is disallowed it will complicate the rating base.

According to Byrd, credit scoring also helps to streamline the automated underwriting process. He added, however, that if allowed to dominate the process, credit scoring could be abused.

According to Watt, most Americans would probably be surprised to learn that late payments on credit cards can increase their auto insurance premiums. “Common sense tells you that speeding tickets, driving under the influence of drugs and alcohol or automobile accidents should increase automobile insurance premiums,” he said.

But North Carolina Senate Majority Leader Tony Rand, D-Fayetteville, said if data can determine that one person is a higher risk than another, then it should be a valid rating factor.

“The more information you have and the longer you look at it, the better and more valid it will be,” Rand said. “The insurance companies are being paid to take a risk and I want the best rate I can get. They (insurers) look at a lot of factors to determine their rates.”

Topics North Carolina