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FTC Backs Use of Credit Scores By Auto Insurers

Jul 24, 2007

By Bruce Mohl, The Boston Globe

Jul. 25--The Federal Trade Commission said yesterday that credit scores are valid predictors of future auto insurance claims, but they tend to penalize African-Americans and Hispanics more than whites and Asians.

The five-person commission voted 4-1 to release the report, with member Pamela J. Harbour dissenting.

Harbour said the data underlying the report were essentially from an incomplete and unreliable insurance industry handout, resulting in flawed conclusions.

The use of credit scores by insurance companies has been a lightning rod in Massachusetts and many other states, with many critics complaining that the scores are proxies for race and income.

In 2003, Massachusetts's insurance commissioner at the time, Julianne M. Bowler, issued regulations that allowed home insurers to use credit scores in setting rates, but abruptly withdrew them after politicians and consumer groups cried foul.

The current insurance commissioner, Nonnie S. Burnes, said last week that she planned to introduce "managed" competition in auto insurance next year. But she added that she would view with "extreme skepticism" any company's rate proposal if it relies on such socioeconomic factors as credit scores, education, occupation, or home ownership.

Burnes declined to comment yesterday, but issued a statement saying she was reviewing the report from the FTC.

Credit-based scores are widely used in the insurance industry to set rates based on who is likely to file a future claim.

The theory is that someone who is responsible with credit -- paying bills on time, keeping debt low, and staying within credit limits -- is more likely to be a responsible driver and should be charged a lower premium.

The FTC report said credit scores are accurate predictors of risk and useful in setting premiums to match the level of risk. The commission said it lacked sufficient evidence to explain why there is a correlation between claims and credit history.

The report said African-Americans and Hispanics typically have lower credit scores, and thus pay higher auto insurance premiums, while whites and Asians typically have higher credit scores, and pay less.

To a lesser degree, the report said, lower-income people tend to have lower credit scores, so they pay higher insurance rates, while higher-income people have higher scores and pay less.

Consumer groups condemned the FTC report as flawed because it relied on a small set of data submitted by the industry.

The groups also said the report minimizes the racial impact of using credit scores.

"It's outrageous that the FTC says that credit scoring is good for consumers when it has a disparate impact on minorities," said Chi Chi Wu, a staff attorney at the National Consumer Law Center in Boston.

"The FTC appears to believe minorities aren't consumers worth protecting."

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