Senate bill would eliminate credit scoring by insurance companies

Insurers say running credit history through secret formula is valid way to arrive at premium

Posted: Wednesday, April 23, 2003

Using personal credit ratings to help determine how much a policy- holder pays for home and automobile insurance makes premiums more equitable and does not target low-income consumers, an insurance industry representative said Tuesday during a Senate hearing.

Sam Sorich, with the National Association of Independent Insurers, told the Senate Labor and Commerce Committee that insurance companies historically have used factors such as driving record, car type, age and driving experience to determine the insurance risk of a person.

He said "credit scoring," a process by which insurance companies run a person's credit history through a secret formula to determine if the applicant is a high risk for filing an accident claim, is no different.

Sen. Kim Elton, a liberal Democrat from Juneau, and Sen. John Cowdery, a staunch Republican from Anchorage, have teamed up on House Bill 13 to end the practice of credit scoring.

Sorich pointed to a study conducted by the University of Texas business school that reviewed 150,000 insurance policies written in 1998. The study found those with a high incidence of claims also had bad credit scores.

Sorich said this and other studies prove using credit information is fair to insurance companies and lowers rates for those who do not file many claims.

"It's clear that the use of credit information helps to make insurance premiums more equitable. It helps insurance companies achieve the goal of making sure that the rates we charge are commensurate with the risk of loss," Sorich said.

This also allows insurance companies to write more insurance policies, he said.

Sorich disputed claims that credit scoring targets the poor.

"In developing these scores, we don't have any information about a person's income," he said. "We don't know where they live, we don't know what type of house they have, we don't know what their race is."

But a Juneau man argued that his insurance premiums would have risen unfairly had the practice of credit scoring been in place when he was faced with huge medical bills.

Thom Buzard, 45, argued the practice could make victims out of responsible citizens who have legitimate credit problems.

Buzard said his life was turned upside down in 1984 when his son was born with what he described as a major birth defect. The hospital visit threw him and his wife into sudden debt and eventual bankruptcy.

"Within 10 days I had over $50,000 in medical bills to save my son's life," he said. "This didn't happen because we were financially irresponsible."

He said if he incurred that debt today, his credit score would be damaged severely and his insurance premiums would go up.

Sorich said some insurance companies take such situations into consideration when determining a person's credit score.

"Can every difficulty be addressed? No. We are dealing with large numbers (of people buying insurance)," he said. "But we are willing to look at our systems and make modifications, and this is one area where we are willing to exclude that kind of situation."

No vote was taken on the bill, which was held for further consideration.

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