Squabbles Over the FTC Insurance Study Miss the Real Issue

The Federal Trade Commission released a report earlier this week about the use of credit scores in settling auto insurance rates. The report revealed a few conclusions, including the fact that credit scores do accurately predict a customer’s future claim filing.

Already a highly controversial practice, this latest study on insurance risk scores has sparked a bevy of press releases from each corner of the debate. According to different groups, the FTC study definitively proves their opposing view points. Here’s a quick summary:

Insurance Journal
According to this insurance trade journal, the FTC report backs their position that the use of credit scores makes insurance more affordable and fair. Their headline? "FTC Finds Use of Credit Helps Consumers."

"Now there should be no doubt about the value of using this highly
predictive underwriting and rating tool…To achieve the goal of
pricing based on an individual’s risk of loss; insurers simply want to
use the most accurate, statistically valid tools available and credit
information has proven to be one of the best predictors of loss. With
these findings, legislators and regulators should be very comfortable
with insurers’ use of insurance scoring."

Consumers Union
The Consumers Union approached the FTC study with a completely different perspective. They assert that the FTC report confirms that the use of credit scores leads to discriminatory pricing. Their headline? "FTC Study Confirms That Credit-Based Insurance Scores Mean African Americans and Hispanics Pay More for Auto Coverage"

"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."

American Insurance Association
The AIA praised the FTC insurance study as validation of the usefulness of insurance credit scores in their release titled "FTC Study Demonstrates Value of Using Credit Information for Auto Insurance."

"The FTC’s study confirms what we have long professed, and many previous studies have shown, credit-based insurance scores help refine insurance pricing to better reflect an individual’s risk profile.  We believe scores reduce subsidization of bad risks by good ones, meaning most consumers pay less for insurance."

Center for Economic Justice, Consumer Federation of America, National Consumer Law Center & National Fair Housing Alliance
These consumer advocacy agencies joined forces for a press release denouncing the FTC study, calling it a "fatally-flawed report [that] relies on handpicked data by insurance industry."

"Representatives of consumer and civil rights organizations today condemned a congressionally-mandated report on insurance credit scoring by the Federal Trade Commission (FTC) as biased insurance industry propaganda. The groups called for Congress to reject the defective study and ban the use of credit scoring in insurance."

So, who’s right? It’s hard to tell with all the shouting, but the reality of insurance credit scoring is that both sides are basically correct.

Yes, credit scoring is an effective and accurate way to predict insurance risk and the practice helps many consumers save money.

Yes, the use of credit scores over driving record to set insurance rates isn’t logical and the practice does lead to African-Americans and Hispanics paying higher rates.

I think all the sides of this debate are really missing the big issue here: Why do African-Americans and Hispanics have lower credit scores than other groups? The credit scoring system itself is completely blind to race, address and other potential discrimination points. A shift in credit scores within these demographics represents a socio-economic crisis far greater than any squabble over car insurance.

Emily Davidson
is editor of CreditBloggers.com and a former credit expert for the
credit bureau, TransUnion. She writes about credit and personal finance
topics.

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Emily Peters