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Insurance based on credit scores stirring controversy

The rates are impacted by credit scores, which some say is like judging based on status or race.

  By Brandon Larrabee

TALLAHASSEE – Despite efforts at the capitol in recent years to end the practice, property and automobile insurance companies in Florida are allowed to use a customer’s credit history in setting premiums, something opponents say could ensnare more Floridians as the economy weakens.

The insurance industry says the practice is justified by data showing that someone with a poor credit score is more likely to report losses to their insurer, but critics say the rules are discriminatory and have no relevance to rates.

Insurance Commissioner Kevin McCarty has pushed for the use of credit scores to help determine premiums to be banned.

“I think 20 years [from now], we’re going to sit back and say, ‘Why did we ever allow this?'” he said recently.

McCarty said it is cut from the same cloth as an old practice, since banned, of allowing race-based rate-setting practices. In fact, some opponents of using credit scores as part of premium calculations say it essentially serves as a stand-in for socioeconomic status or race.

“I believe it’s a significant civil rights issue, frankly, as well as an economic issue,” McCarty said.

Legislation meant to bar the practice for car insurance died in the House and the Senate last spring under pressure from insurance companies, according to lawmakers who supported the measures. But McCarty said he doesn’t intend to abandon the fight.

“What’s right is right, and we’re going to continue to pursue what we think is an unfair underwriting practice,” he said.

Lawmakers who support doing away with the practice say there’s no reason for insurers to tie credit scores – as well as a person’s profession or education, which also wouldn’t be allowed under the bills – to premiums.

“Those things are not synonymous as to why you should receive a higher rate for your insurance,” said Rep. Jennifer Carroll, R-Fleming Island, who co-sponsored a bipartisan House measure to crack down on the practices.

Sen. Ronda Storms, R-Brandon, has filed her measure again for the 2010 legislative session. She said changing credit practices in response to the financial meltdown and rising unemployment have caused even some residents who have been careful with credit to see their scores drop.

“Why should they suddenly be paying higher insurance for something that’s totally unrelated to their insurance?” she said.

For their part, insurers say the practice is based on studies showing solid reasons for tying a person’s premium to their credit score.

“There is a stack of evidence to show that person’s credit status is an indicator of the risk that he or she brings to the table,” said Gary Landry, vice president of the Florida Insurance Council. “We think it’s an accurate indicator of risk, and that’s what insurance is about – gauging risk.”

Landry also said concerns that credit ratings are heading down in the midst of the recession are overblown. Many people, he said, are being more careful because of the bleak economic picture.

“Even as the economy has soured, overall, the average person’s credit has stayed the same or has gotten better,” Landry said.

Landry also played down any fears of the rates harming minority customers, saying, “They are using credit wisely” and not seeing their rates affected.

Barring the practice would hurt a wide range of consumers, Landry said.

“If companies can’t do it, then everyone’s going to see their rates rise,” he said.

Bruce Kellison, associate director of the Bureau of Business Research at the University of Texas, said the ties between insurance losses and a person’s credit are strong. Kellison was part of a research team that did one of the first independent studies of the issue in 2003.

“The data show that credit score is an excellent proxy for insurance losses,” he said.

Kellison said his team didn’t find a cause for the link. “In fact, we’re as confused as the next person about why that is.”

Landry said it’s likely that people who have good credit are more likely to maintain their car and pay their bills on time.