Measures seek to block link between credit, insurance

Posted: Tuesday, April 16, 2002

Lawmakers aiming to ban what they call unfair discrimination in the insurance industry are facing staunch opposition from lobbyists.

And Rep. Harry Crawford, an Anchorage Democrat, says time is running out as the end of the session approaches.

Crawford is one of three legislators seeking to restrict a practice by the insurance industry called credit scoring - a method of determining drivers' and homeowners' insurance rates based on their credit history.

Crawford said credit scoring discriminates against those with bad or little credit even if they have never filed an insurance claim. He challenges the insurance industry's assertion that those with bad credit file more claims.

"There is not good causation between a person's credit score and a person's likelihood of claims," he said.

But with less than a month left in the regular session, Crawford said the effort to pass the bill is getting "close to the wire."

The practice of credit scoring is relatively new to the insurance industry but has become more widely used in the last five years. Prior to basing insurance premiums partially on credit scoring, providers determined the cost of insurance on factors such as claim history, age and driving record.

Juneau Democratic Sen. Kim Elton also has a bill that aims to ban credit scoring, but he said insurance company lobbyists have stalled movement on the measure.

Though insurance companies have argued that a statistical link exists between credit history and claim history, Elton says credit scoring adversely affects those who are not a risk for insurance companies. Religious groups that do not believe in using credit would be affected, as well as commercial fishermen who rely on "Bush credit" and occasionally miss payments while out at sea, Elton said.

"It's not a traditional form of credit," Elton said, explaining Bush credit. "It may mean that you're missing payments, but people are carrying you because they know you're good for it."

John L. George, an insurance industry lobbyist, said the task of determining a person's credit rating is inherently discriminatory.

"Credit scoring is discriminatory but not unfairly discriminatory," he said, adding that 16-year-old males face similar discrimination when charged more for car insurance than are 30-year-old males. George acknowledged that some people would be charged higher rates even if they have never filed a claim, but said the evidence tying credit and claims is "irrefutable."

He said very few people have absolutely no credit history, but those who don't are statistically most likely to file an insurance claim. George also said companies that use credit scoring do not determine insurance premiums solely on credit scores but also consider factors such as claim history.

But this leads to another objection by opponents of credit scoring. Insurance companies determine credit scores by running a credit report through a secret mathematical equation. Elton and other opponents argue that the statistical models vary from provider to provider and prevent customers from learning how their credit score was determined.

Insurance lobbyist John Walsh said insurance customers do not have to buy insurance from providers that practice credit scoring.

"This is a marketplace," Walsh said, though acknowledging that more and more companies are adopting the practice.

Credit scoring has become so common among insurance providers that at least 25 other states are considering banning or limiting the practice.

Hawaii has a complete ban on credit scoring, and the Washington Legislature recently passed a law that limits the practice. Under the Washington law, insurance providers are allowed to use credit scores when considering new customers. But they could not use a person's credit score as a factor when renewing or canceling a policy. The law also directs the commissioner of insurance to research the scoring system and report back to the Legislature.

A bill by Sen. John Cowdery, an Anchorage Republican, aims to ban use of the scoring system. But a committee substitute to the bill by Kasilof Republican Sen. John Torgerson drastically changes the language weakening the bill, according to Cowdery.

The committee substitute allows credit scoring as a partial factor when deciding to renew or cancel a customer's insurance policy.

Cowdery told insurance lobbyists that he didn't see the correlation between high claims and credit, adding that there is probably less of a valid connection for homeowners insurance.

"Does this mean that you are going to burn your house down because of (bad credit)?" he asked.

Cowdery said he will try to prevent the substituted form of the bill from reaching the floor unless there is a compromise.

Timothy Inklebarger can be reached at

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