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NAMIC Skewers Consumer Reports ‘Investigation’ of Credit-Based Insurance Scoring

INDIANAPOLIS (June 28, 2006) – An article in the August 2006 issue of Consumer Reports that purports to reveal a dark “secret” about automobile insurance premiums actually misleads consumers, according to Neil Alldredge, NAMIC senior director of state advocacy.

“It’s common knowledge that insurance companies have been using credit data for years as part of the underwriting and rating process,” said Alldredge. “The Consumer Reports article rehashes false claims and specious arguments that were put to rest long ago after insurance scoring was subjected to rigorous analysis by university researchers and government agencies such as the Texas Department of Insurance.”

Alldredge cited two examples of the false or misleading claims that appear throughout the article:

  • CR: “Few insurers routinely disclose scores or what role they play in setting premiums.”

Fact: Most state laws require insurers to disclose to consumers that credit will be used as a rating factor, and to notify consumers if an adverse action is taken because of their credit history.

  • CR: There are “no standards” governing the use of credit-based insurance scores.

Fact: Most states have established a lengthy set of rules pertaining to insurance scoring. For example, most states prohibit insurers from using credit information as the sole basis for denying, canceling, or non-renewing coverage, or for determining renewal rates. Insurers may not take an adverse action solely because a consumer does not have a credit card, or if a credit report or an insurance score is calculated more than 90 days from the date the policy is written or renewed. Insurers are required to recalculate the insurance score using an updated credit report no less than every 36 months following the last occasion on which the insurer obtained credit information on the insured. Insurers are prohibited from considering credit inquiries not initiated by the consumer; inquiries relating to insurance coverage; collection accounts with a medical industry code; multiple lender inquiries from the home mortgage industry within 30 days of one another; and multiple lender inquiries from the automobile lending industry within 30 days of one another.

In addition to relying on false information, the Consumer Reports article engages in flawed reasoning. For example, the magazine reports that “credit scores used by insurance companies weigh credit data differently from traditional lender scores. As a result, insurance scores can penalize even those consumers who use credit reasonably.”

“How does CR know what constitutes ‘reasonable’ credit use?” asked NAMIC Public Policy Director Robert Detlefsen. “The magazine gives a hypothetical example of someone who would supposedly be ‘penalized’ by an insurer for using credit in a way that a ‘traditional lender’ would ‘bless with a low-interest mortgage.’ But CR provides no evidence to support this assertion. It appears to be based on nothing more than sheer speculation.” The magazine ignores the fact that credit-based insurance scores are used to predict the relative risk of loss, whereas lenders use credit scores to predict the likelihood of repayment. CR could have illuminated this important distinction, but instead lumped the two uses together in an effort to mislead consumers.

The magazine also repeats the familiar canard that “credit data from which the scores are derived have a reputation for being inaccurate and out of date.” But it fails to explain why credit scores are used by an ever growing number and variety of business entities. Landlords use them to evaluate prospective tenants, public utilities use them to determine which new customers must pay a deposit, and employers use them to evaluate job applicants. “If credit scores are known to be unreliable, why are they so widely used?” Detlefsen asked.

The article either ignores or glosses over inconvenient truths. For example, it briefly mentions that a 2005 study by the Texas Department of Insurance “confirmed the strong relationship between scores and claims.” Yet the overall tone and substance of the article implies that using credit-based insurance scores to assess risk is irrational and unfair to consumers.

According to the magazine’s own news release, “Advocates from Consumers Union, the publisher of Consumer Reports, have been urging legislators and regulators in several states to ban the use of credit scoring to underwrite homeowners and auto insurances policies.”

“It’s unfortunate, but perhaps not surprising, that CR would publish a piece of naked propaganda that’s obviously intended to further its lobbying campaign,” said Alldredge.

For further information, contact
Robert Detlefsen, Ph.D.
(317) 875-5250 Tel
(317) 879-8408 Fax

Posted: Wednesday, June 28, 2006 12:00:00 AM. Modified: Thursday, June 29, 2006 10:10:59 AM.

317.875.5250 - Indianapolis  |  202.628.1558 - Washington, D.C.

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