About the author

John Lobert is a legislative and regulatory affairs lawyer. His firm, Lobert Legislative & Regulatory Consulting, provides public policy advice and planning to both the insurance and reinsurance industries.

More by John Lobert »
Contact John Lobert »

Nothing inspires a politician more than a good populist cause, and one of the most populist of all causes in the last ten years or so has been insurers’ use of credit scoring. It has provided fuel for a fire that no one can effectively extinguish. No response to charges levied against its use is sufficient. Its benefits do not matter. In short, as far as government and the public are concerned, it is indefensible, but insurers insist on fighting for the ability to use it.

This is all good news for insurance lobbyists. We think of it fondly as the gift that keeps on giving. We have defended it in state legislatures, insurance departments, Congress, the National Association of Insurance Commissioners and the National Conference of Insurance Legislators. Have I forgotten any? Every time one of these entities deals with it in some fashion short of banning it, they turn around a year later and address it again. It is the equivalent of a continuing stimulus program for lobbyists.

The objections to insurance companies using credit scoring come in at least a couple of flavors. First, there are those who say it doesn’t make any sense. What does my use of credit have to do with how much I should be charged for auto or homeowners insurance? Second, there are those who say its use isn’t fair. If I lose my job or have a serious illness and it affects my credit score, why should I have to pay higher insurance premiums? Of course, we shouldn’t forget those who just plain hate insurance companies and anything they do.

Insurers and vendors of the scores (and now we start calling them “insurance scores,” not “credit scores”) have answers, good answers, to all of this criticism (except, of course, “I hate you”), so let’s get started.

First, not all insurers use them. This means if you don’t like it, select another insurer. Second, unlike banks, insurers never consider income. Third, most state laws place limits on the information that may be considered in calculating an insurance score. For example, in many states insurers cannot consider any medical bills listed on a credit report.

But getting back to the first issue—what this has to do with insurance risk—is hard to respond to because this is where we get bogged down in a discussion about correlation versus causation. Studies show a correlation between the scores and driving habits. Even most critics have to agree that it’s there. As for causation, all we can do is draw inferences. Probably the most widely circulated theory is that how one manages his or her credit reflects how that person is likely to behave in other aspects of life. For example, someone who is careful about their finances is also likely to prove careful in driving or maintaining their home. Conversely, a person who is less attentive to their finances will also tend to be less attentive in other matters.

Some supporters of insurance scoring say that focusing on causation is immaterial if the correlation exists. Keep your eye on the ball and don’t listen to the naysayers. That doesn’t work because the naysayers also say that the practice disadvantages the poor and the young with no credit history and is a surrogate for race. The response to that red-herring is that credit-based insurance scores do not consider a consumer’s income, race, age, address, marital status, or nationality because insurers are legally prohibited from considering them when calculating a score. An insurance score only measures risk-relevant variables that are indicators of potential future risk. Living within one’s means and paying bills on time are not traits that are restricted to any particular race or income bracket.

The result is that most consumers either benefit or realize no impact from insurers’ use of the scores, and only a small percentage pays more. This means that they are paying a more individualized premium. But now we return to government’s never-ending interest in the subject.

State legislatures have mostly come and gone this year, and hoppers were filled once again with bills. Fortunately, no damage was done this time. Congress has held yet another hearing, and now members of the House plan to introduce legislation on credit scores. The NAIC has announced that it is going to commence hearings on the subject. In one note of sanity, the Michigan Supreme Court ruled once again that that state’s insurance regulator does not have authority to ban its use.

And so the battles go on, providing a continuing paycheck for lawyers and lobbyists. Thanks for the gift, everyone.