A national consumer group stepped up its criticism of a recent government report on the use of credit scoring by auto insurers, claiming that the Federal Trade Commission report confirms that African American and Hispanic drivers pay more for auto insurance as a result.
“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.”
Insurance companies have hailed the FTC study as further proof of a connection between credit information and the risk of loss, and maintained that the study finds that its use helps to increase the availability and affordability of insurance for most consumers.
But according to Garcia, the FTC report also proves that African Americans and Hispanics are “substantially overrepresented” among consumers with the lowest 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 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, she added.
“While insurance companies may not intend to discriminate, the result is the same,” Garcia said. “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 accidents, but critics contend 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 said it does not believe that justifies the practice.
“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,” Garcia said. “Credit scores shouldn’t be a factor when it comes to pricing.”
Insurance companies’ scoring formulas are for the most part confidential, and 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.
Because of this, CU maintains that it’s difficult for consumers to gauge what to do to increase an insurance score, or to know what factors are viewed more favorably by insurers.
Using credit scores to price insurance also is problematic for consumers because the score is derived from information from credit reports, which may not be completely accurate, according to critics. A 2004 study by the U.S. Public Interest Research Group found that one in four credit reports contained serious errors.
“Too many credit reports contain serious errors,” Garcia said. “Even those consumers with good credit may have a lower than expected insurance score because of the peculiar ways insurance companies weigh credit behavior.”