Stakes mount in fight over ‘insurance scoring’

May 29, 2008

Palm Beach Post–May 27, 2008

Palm Beach Post Staff Writer

A five-year battle over whether insurance companies in Florida should be allowed to charge higher rates or even deny coverage to people with poor credit histories is headed back to the courts.

A state administrative law judge is expected to weigh in next month with a decision that will determine whether new state rules that would end the practice are legal.

”We feel confident the judge will rule in our favor,” said Gary Landry, vice-president of the Tallahassee-based Florida Insurance Council, which has challenged state regulators who want to stop what is known as “insurance scoring.”

The council could appeal the law judge’s ruling, but regulators already have a Plan B.

Starting Oct. 1, the state’s Office of Insurance Regulation will deny rate hikes for auto insurers unless the company can show that their scoring formulas do not have a disproportionate effect on blacks, Hispanics, the young and the elderly, said Steve Parton, the office’s general counsel.

Parton said he doesn’t expect the rule to go unchallenged. “We expect insurers to sue,” he said.

Landry won’t say what the insurance industry will do, but the change would end the use of credit history for setting rates.

Insurers insist they don’t discriminate, but also concede they can’t prove that because they don’t collect information about the race of their policyholders.

The insurance industry started using credit history as a rating factor in the 1990s, saying studies showed that people with poorer credit had a higher likelihood of filing insurance claims than those with good credit.

Florida Insurance Commissioner Kevin McCarty testified before a House Financial Services subcommittee last week that there’s a good reason people with poorer credit file more claims: They don’t have the money.

”Wealthier individuals with high credit scores may not file a legitimate insurance claim for a broken window or for a minor fender-bender, electing to pay the repairs themselves so as to not impact their claims history,” McCarty said.

A federal study has only increased the controversy.

The Federal Trade Commission last summer found that credit scores are an accurate predictor of risk for all demographic groups buying auto insurance and that the practice was beneficial to consumers because those with good credit can be offered lower rates.

While the report found minorities’ scores were lower as a whole, it said the impact was relatively small.

The report was immediately slammed by consumer groups who said the report was “flawed” because it relied on handpicked data from the insurance industry.

Several states, including Hawaii, California, Maryland and Massachusetts, either ban insurance scoring or severely limit the practice.

Bills also have been introduced in Congress that would ban the practice nationwide, but passage is considered unlikely. In Florida, the legislature has refused to go along with McCarty, leaving him to deal with the issue through his administrative powers to issue new rules.

But state lawmakers also refused this year to extend parts of a state law that currently keeps credit-scoring formulas confidential.

Those formulas will no longer be a trade secret as of Oct. 1.