FTC Study Confirms That Credit-Based Insurance Scores Mean African Americans and Hispanics Pay More for Auto Coverage

    WASHINGTON, July 24 /PRNewswire-USNewswire/ -- A study released today
 by the Federal Trade Commission confirms that African American and Hispanic
 drivers pay more for auto insurance because insurers use credit scores to
 determine premiums. The use of credit scores in insurance has long been a
 controversial practice because of its discriminatory impact on low income
 and minority families.
     "It's not fair that consumers with spotless driving records can be
 penalized with higher premiums just because of their credit score," said
 Norma Garcia, Senior Staff Attorney with Consumers Union. "Insurance
 premiums should be based on the risk of an accident, not a consumer's bill
 paying record for other goods and services.
     The FTC report concluded that African Americans and Hispanics are
 substantially overrepresented among consumers with the lowest credit
 scores. It found that "more than one-half of all African Americans have
 credit scores in the lowest quarter of the overall score distribution, and
 one-half of all Hispanics have credit scores in the lowest third of the
 overall score distribution." As a result, African Americans and Hispanics
 pay more, on average, for auto insurance coverage than non-Hispanic whites
 and Asians.
     "While insurance companies may not intend to discriminate, the result
 is the same," said Garcia. "Basing insurance premiums on credit scores
 means low income and minority consumers are forced to pay higher rates than
 others with the same driving record or claims history."
     The insurance industry has argued that drivers with low credit scores
 are more likely to get into an accident even though there is no evidence to
 support such a claim. The FTC found that there is a correlation between a
 low credit score and a higher chance of filing a future claim, but
 Consumers Union does not believe that justifies the practice because of its
 discriminatory impact.
     "It's simply unfair for insurers to charge consumers more up front just
 because of the possibility they might use their policy at some point in the
 future," said Garcia. "Credit scores shouldn't be a factor when it comes to
 pricing insurance."
     Insurance companies have kept their scoring formulas secret, preventing
 an independent, public review of the actuarial soundness of their scoring
 models. The FTC report confirmed that there is no single mathematical model
 for how insurers use credit information to influence insurance decisions or
 for how they derive insurance scores from credit information. It's hard for
 consumers to gauge what they can do differently to increase an insurance
 score, or even to know what factors are viewed more favorably by different
 insurers. Even consumers with good credit can be forced to pay higher
 premiums because of the peculiar way that insurance companies weigh credit
 data.
     Using credit scores to price insurance also is problematic for
 consumers since the score is derived from information from credit reports,
 which may not be completely accurate. A 2002 study by the Consumer
 Federation of America estimated that tens of millions of Americans are
 unfairly penalized for incorrect information in their credit reports. More
 recently, a 2004 study by the U.S. Public Interest Research Group found
 that one in four credit reports contained errors serious enough to cause
 consumers to be denied credit, housing, or even a job.
     "Insurance companies insist that credit scores are a reliable predictor
 of future claims and yet they have no idea whether the credit information
 they are using is accurate," said Garcia. "Too many credit reports contain
 serious errors. This can result in a lower insurance score and higher
 premiums. Even those consumers with good credit may have a lower than
 expected insurance score because of the peculiar ways insurance companies
 weigh credit behavior."
     The use of credit scoring in insurance is unnecessary because insurers
 have a variety of remedies available to protect themselves against
 consumers who file too many claims. Insurers can raise premiums for those
 who file too many claims or even terminate claims-prone consumers. These
 measures don't lead to the same unfair results for consumers when credit
 information is used to underwrite a policy. Unlike credit scoring, these
 actions can be based upon verifiable risk behavior, not on information with
 no causal relationship to risk of loss.
     Consumers Union, publisher of Consumer Reports, is an independent,
 nonprofit testing and information organization serving only the consumer.
 We are a comprehensive source of unbiased advice about products and
 services, personal finance, health nutrition, and other consumer concerns.
 Since 1936, our mission has been to test products, inform the public, and
 protect consumers.
 
 

SOURCE Consumers Union