Career Center Powered by GreatInsuranceJobs.com
Nine carriers that control 60 percent of the U.S. homeowners insurance market have agreed to comply with a Federal Trade Commission subpoena requesting additional information on how credit scoring data is used to set premium rates.
The carriers that will supply the data by April 24 are Allstate, American Family Mutual, Chubb, Fire Insurance Exchange, Liberty Mutual, Nationwide Mutual, State Farm, Travelers and the United Services Automobile Association.
In a statement, Allstate said it would comply with the subpoena, adding that it supported the FTC’s “efforts to analyze the effects of credit-based insurance scoring on consumers.” Mike Siemienas, an Allstate representative, said: “We intend to work with the FTC to assemble the needed data as efficiently as possible.”
The decision to ask for the data was not a surprise. The agency in May asked for comment on a draft model order it could use in formulating its request for data in a fashion that wouldn’t burden the insurers.
Mr. Siemienas said the subpoenas reflect the comments received on how best to proceed. He said that besides filing comments, Allstate and others in the industry have had discussions with FTC staff to work through the technical issues with the draft data call, as well as ways to potentially improve it for the benefit of the FTC and all parties.
“As we analyze the FTC’s data call, protecting our customers’ privacy will remain a top priority,” he said.
The FTC and the Federal Reserve Board both issued studies in 2007 under a mandate from a 2003 law, which concluded that use of credit scores is an “effective predictor” of risk under auto insurance policies. Indeed, the report said use of credit-based insurance scores “may result in benefits for consumers.”
But consumer groups contested the conclusions, and members of the House Financial Services Committee implored the FTC to take another look.
One of the concerns voiced was the report’s finding that credit-based insurance scores are distributed differently among racial and ethnic groups, and this difference is likely to have an effect on the insurance premiums that these groups pay, on average.
Specifically, the report said, non-Hispanic whites and Asians are distributed relatively evenly over the range of scores.
However, African-Americans and Hispanic non-whites are substantially overrepresented among consumers with the lowest scores—those associated with the highest predicted risk—which could have a disparate impact on their insurance rates.
J. Robert Hunter, insurance director for the Consumer Federation of America, said he supported the FTC’s request for more information. “As a matter of policy, CFA supports banning the practice, because we think the [credit score] data as used discriminates against low-income and minority populations,” he said.
But at the very least, he added, “it should be analyzed by objective means to determine the effects of credit scoring on vulnerable populations within the markets.”
Mr. Hunter maintained that the earlier study was based on data collected by the industry in a way that was not objective.
In this new study, the agency will analyze the raw data itself. “It will not have been massaged by the industry on the way to the FTC,” he said.
The American Insurance Association was critical of the data request, saying the group is “disappointed the FTC chose this route, despite the industry’s good-faith efforts to work cooperatively to find a sensible, secure and cost-effective alternative to provide the data the FTC says it needs to conduct its study.”
AIA’s vice president and assistant general counsel, David Snyder, said “the use of a compulsory process does not allay our serious concerns about the handling and protection of massive amounts of consumer data.”
In July 2007, the FTC released its study of auto insurance and credit-based insurance scores—completed without subpoenaing information from insurers—which further confirmed the efficacy, objectivity, consumer benefits and risk-based value of such scores, according to the AIA.
Mr. Snyder said the “use of credit-based insurance scores benefits a vast majority of consumers, and is one of the tools that enable insurers to provide sound pricing models. We’re confident the FTC, just as they found in their auto study, will learn the same thing in this latest examination.”
He said consumers should be very concerned that the FTC has ordered companies to hand over such a vast amount of data, including items such as a policyholder’s Social Security number and mortgage information, “with few assurances as to how that data will be analyzed, handled, stored and used.”
The AIA, Mr. Snyder added, “will be watching this process as it plays out, to do our best to ensure that company and consumer interests are protected.”
Jimi Grande, vice president of federal and political affairs for the National Association of Mutual Insurance Companies, also voiced disappointment over the FTC decision to use a compulsory process, instead of the voluntary method employed in preparing prior studies.
Mr. Grande said he doesn’t expect the findings as a result of the use of compulsory data to be different than the findings of earlier studies. “No matter how many studies are conducted on the use of credit-based insurance scoring, the results are consistent,” he noted, adding that “study after study after study has clearly indicated that allowing insurers to use the full gamut of effective and accurate underwriting tools—such as credit-based insurance scoring—results in pricing that better reflects the risk and leads to discounts for the majority of insurance consumers.”
Mr. Grande pointed out that the FTC, Federal Reserve Board and many state insurance departments have conducted studies about the potential of discrimination in insurance rates through the use of credit scoring, and “all conclude that credit-based insurance scoring benefits consumers and is not unfairly discriminatory.”
“Conducting the same studies over and over trying to get the result you want seems to be an exercise in futility,” he said. “The evidence is clear that more accurate underwriting benefits consumers.”
Representatives for the Property Casualty Insurers of America also argued that doing away with the use of credit scoring would do consumers more harm than good.
“Credit information is more likely to help consumers pay less for their insurance,” said Ben McKay, PCI’s senior vice president of federal affairs. “Insurers consider credit information in their underwriting and pricing decisions for only one reason—to rate and price business with a greater degree of accuracy and certainty.”
He said information provided to the FTC will show that “insurers use credit as a nondiscriminatory tool to accurately predict the risk of loss,” adding that “as in the past, this study will show the predictive power of credit-based insurance scores.”