Trades React To FTC Subpoena

Dec 29, 2008


Two insurance industry trade groups are voicing deep concern over the Federal Trade Commission’s decision to subpoena data dealing with the use of credit scoring to set homeowners insurance rates.

A third trade group used the occasion to bring home the point that consumers benefit when insurers use credit information to understand policyholder risk.

The groups, the American Insurance Association, the Property Casualty Insurers of America and the National Association of Mutual Insurance Companies, were reacting to a Dec. 23 decision by the FTC to seize the records of nine insurers so it can independently determine whether use of credit scoring in setting rates discriminates against low-income and minority populations.

In its statement, the AIA raised concerns that use of the records constitutes a potential breach of consumer privacy.

“We are disappointed the FTC chose this route, despite the industry’s good faith efforts to work cooperatively to find a sensible, secure, and cost effective alternative to provide the data the FTC says it needs to conduct its study,” said David Snyder, AIA vice president and assistant general counsel. 

“The use of a ‘compulsory process’ does not allay our serious concerns about the handling and protection of massive amounts of consumer data,” he added.

Mr. Snyder argued that the use of credit-based insurance scores benefits a vast majority of consumers and is one of the tools that enable insurers to provide sound pricing models.

“We’re confident the FTC, just as they found in their auto study, will learn the same thing in this latest examination,” Mr. Snyder said.

He said consumers should be very concerned that the FTC has ordered companies to hand over such a vast amount of data, including items like a policyholders social security number and mortgage information, “with few assurances as to how that data will be analyzed, handled, stored and used.”

The AIA, Mr. Snyder said, “will be watching this process as it plays out, to do our best to ensure that company and consumer interests are protected.”

Jimi Grande, vice president, federal and political affairs for NAMIC, voiced disappointment over the FTC decision to use the compulsory process, instead of a voluntary one used in preparing prior studies by the FTC and the Federal Reserve Board.

Mr. Grande said he doesn’t expect the findings as a result of the use of compulsory data to be different than the findings of earlier studies.

“No matter how many studies are conducted on the use of credit-based insurance scoring, the results are consistent,” Mr. Grande said, adding that “study after study after study has clearly indicated that allowing insurers to use the full gamut of effective and accurate underwriting tools—such as credit-based insurance scoring—results in pricing that better reflects the risk and leads to discounts for the majority of insurance consumers.”

Mr. Grande pointed out that the FTC, Federal Reserve Board and many state insurance departments have conducted studies about the potential of discrimination in insurance rates through use of credit scoring. “They all conclude that credit based insurance scoring benefits consumers and is not unfairly discriminatory,” he said.

 “Conducting the same studies over and over trying to get the result you want seems to be an exercise in futility,” he said. “The evidence is clear that more accurate underwriting benefits consumers.”

PCI representatives argued that the use of credit scoring is beneficial.

“Credit information is more likely to help consumers pay less for their insurance,” said Ben McKay, PCI’s senior vice president of federal affairs. Insurers consider credit information in their underwriting and pricing decisions for only one reason—to rate and price business with a greater degree of accuracy and certainty.”

He noted that information provided to the FTC will show that “insurers use credit as a non-discriminatory tool to accurately predict the risk of loss.”

Insurers being requested to provide information include the nine largest private providers of homeowners insurance: State Farm Mutual Automobile Insurance Company, The Allstate Corporation, Fire Insurance Exchange, Nationwide Mutual Insurance Company, The Travelers Companies, Inc., United Services Automobile Association, Liberty Mutual Holding Company, Inc., The Chubb Corporation, and American Family Mutual Insurance Company.

Mr. McKay said the insurance industry has worked closely with the FTC and will continue to do so to provide relevant information to study this issue.

“As in the past, this study will show the predictive power of credit-based insurance scores,” Mr. McKay predicted.