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2007-07-11 21:30:00

Consumer Group: Insurance Credit Scoring Is 21st Century Redlining

The National Consumer Law Center announces the availability of a new resource on the debate over the use of credit scores in insurance underwriting.  Entitled “Credit Scoring and Insurance: Costing Consumers Billions and Perpetuating the Economic Racial Divide,” this report pulls together in one document the compelling arguments against using credit scores to determine whether consumers will get home and auto insurance, and for what price.

Insurance companies use credit scores - three digit numbers generated using a consumer’s credit report - in insurance underwriting and ratesetting.  The new NCLC report documents the numerous problems with this practice, include a summary of the many studies indicating enormous racial disparities created by credit scoring.  

“Credit scores are essentially a numerical expression of the huge economic divide we have based on race in this country,” noted Chi Chi Wu, NCLC Staff Attorney and the report’s primary author, “As such, the use of these scores in insurance perpetuates and reinforces this racial wealth divide.”

The NCLC report includes an analysis by Birny Birnbaum of the Center for Economic Justice on how insurance credit scores cost consumers billions of dollars every year, potentially in the neighborhood of $67 billion.  According to Birnbaum, “Insurance credit scoring is truly 21st Century redlining.  Contrary to insurer claims that insurance scoring is simply about accurate risk assessment, insurers' use of consumer credit information has led to huge increases in insurer profits and excessive rates.”

Other issues addressed in the NCLC report include:

  • Consumers lack information about the use of credit scoring in granting or pricing insurance, with only 36% in one survey indicating they know about the practice.
  • Some of the factors used in insurance scoring models are questionable, such as penalizing consumers with fewer than 2 credit card accounts.  Credit scoring in general has been criticized for high rates of errors and data inconsistency between the major credit bureaus.
  • The insurance industry alleges that credit scoring is predictive in forecasting which consumers will have higher losses yet they have not offered a satisfactory explanation as to why this correlation exists.
  • Anti-discrimination laws present limited avenues to challenge the racial disparities created by credit scoring, especially with respect to home insurance.

The report’s authors call upon states to outlaw the practice of using credit scores in insurance.  The NCLC Insurance Scoring report is available at reports/content/InsuranceScoring.pdf.

NCLC is a non-profit organization specializing in consumer issues on behalf of low-income people.  NCLC works with thousands of legal services, government and private attorneys, as well as organizations, who represent low-income and elderly individuals on consumer issues.

The Center for Economic Justice is a nonprofit advocacy and education center dedicated to representing the interests of low-income and minority consumers as a class on economic justice issues. Most of its work is in administrative advocacy on insurance, utilities, and credit: the tools necessary for the poor to pull themselves out of poverty.  

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