Carriers Questioned by House on Auto Premiums and Credit Rating Link

On Tuesday, the House Committee questioned carriers on the practice of basing auto insurance premiums on a customer's credit rating. Critics are asking whether this practice disproportionately hurts young people and minorities. 
 
"If I got my credit score up, would that make me a better driver?" asked Rep. Mel Watt, D-N.C., chairman of the House Financial Services oversight subcommittee. 
 
Last summer, Watt's panel heard testimony on a Federal Trade Commission report indicating that credit rating scores are effective predictors of the number of claims consumers file and the costs of those claims. 
 
The report concluded that credit-based insurance scores may benefit consumers because they allow insurers to more accurately evaluate risks. But it also acknowledged that a higher percentage of blacks and Hispanics have low credit ratings that could lead to their paying higher premiums for auto insurance. 
 
Blacks and Hispanics are more likely on average to have lower scores, FTC Commissioner J. Thomas Rosch told the hearing. It "serves as a reminder of the fact that some things even today in our society may adversely affect racial and ethnic minorities." 
 
The FTC said that in models with credit-based insurance scores, blacks were projected to have average predicted risk 10 percent higher, and Hispanics 4.2 percent higher, than if the scores were not used. 
The report noted insurance companies began to use credit-based insurance scores in the mid-1990s, and that now all major auto insurers use those scores to some capacity. 
 
"Most Americans probably would be surprised that a late payment on their credit cards can dramatically increase the premiums they pay on automobile insurance," said Watt, citing examples of people who saw their rates go up because they had no credit history or a woman whose insurance premium jumped after her husband declared bankruptcy. 
 
Many states have either banned or limited the use of credit ratings in determining premiums. 
J.P. Schmidt, commissioner of insurance for Hawaii, said his state banned the link 20 years ago after deciding that it could result in discriminatory practices and that the benefits were "outweighed by the potential for harm to a greater number of the state's citizens." 
 
Many immigrants and young people have no credit history, resulting in higher risk designations, said Eric Rodriguez of the National Council of La Raza. 
 
Washington state's insurance commissioner, Mike Kreidler, said his state five years ago passed limitations such as barring insurers from canceling or refusing to renew policies because of credit ratings. But he said it "make me very nervous" that other factors, such as education and occupation, are starting to creep into insurers' calculations in determining rates. 
 
But Rep. Gary Miller of California, the top Republican on the panel, said it would be "irresponsible for insurance companies to ignore" the fact that people with bad credit histories are more likely to have accidents. He said he would hate to see the practice banned with the result that people with bad records are subsidized. 
 
Watt also cautioned against federal intervention, noting that states have traditionally regulated insurance and "should continue to do so."