Credit-Based Insurance Scores: Impacts on Consumers of Automobile Insurance
Over the past decade, insurance companies increasingly have used information about credit history in the form of credit-based insurance scores to make decisions whether to offer insurance to consumers, and, if so, at what price. Because of the importance of insurance in the daily lives of consumers, the widespread use of these scores raises questions about their impact on consumers. In particular, some have expressed concerns about the effect of scores on the availability and affordability of insurance to members of certain demographic groups, especially racial and ethnic minorities.
In 2003, Congress enacted the Fair and Accurate Credit Transactions Act (FACTA) to make comprehensive changes to the nation’s system of handling consumer credit information. In response to concerns that had been raised about credit-based insurance scores, in Section 215 of FACTA Congress directed certain federal agencies, including the FTC, to conduct a broad and rigorous inquiry into the effects of these scores and submit a report to Congress with findings and conclusions. The report is intended to provide policymakers with critical information to enable them to make informed decisions with regard to credit-based insurance scores.
Section 215 of FACTA sets forth specific requirements for studying the effects of credit-based insurance scores in the context of automobile and homeowners insurance. It directs the agencies to include a description of how these scores are created and used, as well as an assessment of the impact of scores on the availability and affordability of automobile and homeowners insurance products. Section 215 also requires a rigorous and empirically sound statistical analysis of the relationship between scores and membership in racial, ethnic, and other protected classes. The mandated study furthe must evaluate whether scores act as a proxy for membership in racial, ethnic, and other protected classes. Finally, Section 215 requires an analysis of whether scoring models could be constructed that both are effective predictors of risk and result in narrower differences in scores among racial, ethnic, and other protected classes.
Section 215 of FACTA also specifies the process to be used in conducting the study, and the contents of the report to be submitted. The Act directed the agencies to seek input from federal and state regulators and consumer and civil rights organizations, and members of the public concerning methodology and research design. The Act requires the report to include “findings and conclusions of the Commission, recommendations to address specific areas of concerns addressed in the study, and recommendations for legislative or administrative action that the Commission may determine to be necessary to ensure that . . . credit-based insurance scores are used appropriately and fairly to avoid negative effects.”
The Commission has conducted a study addressing credit-based insurance scores in the context of automobile insurance. Pursuant to statutory directive, the FTC published two Federal Register Notices soliciting comments from the public concerning methodology and research design. The Commission supplemented this information with numerous discussions between its staff and representatives of other government agencies, private companies, and community, civil rights, consumer, and housing groups. The public comments and information obtained in meetings with the various interested parties provided essential information that allowed the Commission to complete this report. In addition, feedback from state regulators, industry participants, and the consumer, civil rights, and housing groups had a substantial impact on the methodology and scope of the analysis.
This report discusses the information that the FTC considered, its analysis of that information, and its findings and conclusions. Parts I and II above present an Executive Summary and Introduction, respectively. Part III is an overview of the development and use of credit-based insurance scores, and Part IV discusses the relationship between credit history and risk. Part V addresses the effect of credit-based insurance scores on the price and availability of insurance. Part VI explores the impact of credit-based insurance scores on racial, ethnic, and other groups. Part VII describes the FTC’s efforts to develop a model that reduces differences for protected classes of consumers while continuing to effectively predict risk. Part VIII is a brief conclusion.