Bill would halt 'credit scoring'

Insurance rates would no longer be linked to credit history if newly filed bill wins approval

Posted: Monday, January 13, 2003

A Republican and Democrat are teaming up in the Senate this legislative session on a law that would prohibit an insurance industry practice that sets rates based on credit history.

Sen. Kim Elton, a Juneau Democrat, and John Cowdery, an Anchorage Republican, say the use of "credit scoring" - a method of determining home and automobile insurance payments based on one's credit - unfairly discriminates against seniors, minorities, seasonal workers and members of certain religious and ethnic groups.

Separate bills filed by Cowdery and Elton last session died in committee.

Last session insurance industry lobbyists argued the evidence tying poor credit to insurance claims is "irrefutable."

"Credit scoring is discriminatory but not unfairly discriminatory," said insurance lobbyist John L. George last April.

George noted 16-year-old boys face similar discrimination when charged more for car insurance than 30-year-old men.

But Elton and Cowdery contend credit scoring often leads to "nonsensical outcomes."

Elton said in a prepared statement that testimony from last session by two Alaska drivers with the same car and similar driving profiles demonstrates the discrimination of credit scoring.

Their testimony revealed that the driver with better credit paid a lower insurance rate despite the fact that he had been arrested for driving while intoxicated.

"That's unfair discrimination and it needs to stop," Elton said.

He said there are many scenarios under which a poor credit report can be established and then unfairly applied to someone applying for auto or home insurance.

Unfair credit scores can affect women who recently have divorced and have not established credit, those with religious convictions that prevent them from using credit, and seasonal workers who rely on informal agreements known as "Bush credit" and occasionally miss payments while out to sea, Elton said.

Elton said the issue also is one of consumer awareness, adding that most people assume insurance rates are based solely on claim history and driving record.

He said the practice of credit scoring prevents drivers from knowing how their insurance rates are determined because the method used for figuring credit scores is not made public by insurance companies.

"A credit score is essentially what happens when you take a credit report and run it through a black-box formula," Elton said.

Cowdery added low credit scores are not necessarily determined by late payments or bankruptcies.

"Just having a store credit card like JC Penny's or Nordstrom's can lower your score," Cowdery said in a prepared statement. "Why should that mean that you pay more to insure your house?"

In addition to having bipartisan support for the bill, Elton said credit scoring also is widely opposed by insurance agents.

In a letter sent to the state Senate last April, the National Association of Professional Allstate Agents voiced their opposition to credit scoring, stating:

• Credit scoring is a secret methodology not subject to examination by insurance commissioners.

• Credit scoring appeared when insurance companies were denied the ability to target certain geographical areas and certain minority groups for higher rates.

• Minorities, low-income groups and senior citizens who do not regularly make use of credit particularly are affected.

• Credit scoring allows insurance companies to make rate increases at their sole discretion by adjusting the formula used to determine credit scores.

Senate Bill 13 by Cowdery and Elton will be introduced Jan. 21, the first day of the legislative session.

Rep. Mike Chenault, a Nikiski Republican, also has prefiled similar legislation in the House.

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