FTC Testifies Before U.S. House Subcommittee on Credit-Based Insurance Scores Study

The Federal Trade Commission today described for Congress its study concerning credit-based insurance scores and automobile insurance. Announced in July, the study found that these scores are effective predictors of the claims that consumers will file and that, on average, African-Americans and Hispanics tend to have lower scores than non-Hispanic whites and Asians, and so the use of scores is likely to increase the amount they pay for automobile insurance relative to the amount that non-Hispanic whites and Asians pay.

In testimony for the FTC, Commissioner J. Thomas Rosch told the Subcommittee on Oversight and Investigations of the U.S. House Financial Services Committee that the Commission intends to conduct a similar study of the impact of credit-based insurance scores on the availability and affordability of homeowners insurance. Commissioner Rosch noted that concerns had been raised that insurance companies voluntarily provided the information used in the automobile insurance study. He said that to increase public confidence in its homeowner insurance study, the agency intends to use its authority under Section 6(b) of the FTC Act to compel insurance companies to provide homeowners policy information to the Commission.

According to the testimony, credit-based insurance scores typically are calculated using information about past delinquencies and information on the public record, such as bankruptcy; how close a consumer is to his or her credit limits; evidence of seeking new credit; the length and age of the credit history; and the use of certain types of credit. Insurance companies use scores as a factor when estimating the number or total cost of insurance claims that prospective customers are likely to file, and then use the information to assign consumers to risk pools and to determine the premiums they pay.

Although the study found that scores predict both the number of claims that consumers
are likely to file and the total cost of those claims to the insurance company, it is not clear why scores are effective predictors of automobile insurance risk, according to the testimony. The study found that scores predict risk within racial and ethnic groups, e.g., African-Americans with higher scores file fewer claims than African-Americans with lower scores, and that scores have a relatively small effect as a statistical proxy for race and ethnicity. Despite substantial efforts, the testimony noted, the FTC was not able to develop a credit-based insurance score model that effectively predicted risk and narrowed the differences in scores among racial and ethnic minority groups.

In conclusion, the Commission’s testimony noted that, in addition to conducting research and policy activities to inform the debate about credit-based insurance scores, the Commission also provides consumers with critical information so they can make better-informed decisions. To help them make these decisions, the agency recently revised and reissued its English- and Spanish-language consumer education materials to provide greater emphasis to the link between credit history and insurance premiums.

The Commission vote authorizing the presentation of the testimony and its inclusion in
the formal record was 5-0. A copy of the testimony can be found on the FTC’s Web site and as a link to this press release.

Copies of the testimony are available from the FTC’s Web site at http://www.ftc.gov and from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint in English or Spanish or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1-877-382-4357), or use the complaint form at http://www.ftc.gov/ftc/complaint.shtm. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to more than 1,600 civil and criminal law enforcement agencies in the U.S. and abroad.