RS21341 -- Credit Scores: Credit-Based Insurance Scores
Updated January 19, 2005

	Background on Insurance Scoring

An insurance score, a type of credit score, is a number produced by a proprietary computer scoring model that analyzes a person's credit history information,such as payment history, collection, balances, and bankruptcies. (1) CRAs aresubject to the consumer protections set forth in the Fair Credit Reporting Act (FCRA). (2) Credit scores have been used widely for some time in credit-relatedbusinesses such as banks, home mortgage lenders, and credit card issuers, but the use of insurance scores by insurersis relatively new. (4) Insurers maintain that there is a clearstatistical connection between a person's insurance score and the likelihood of that person filing claims, aswell as how expensive such claims might be. Either way, insurers say the link betweeninsurance scores and insurance losses is clear,and point to two possible explanations. This isgenerally referred to as the "disparate impact" of the use of credit scores. CongressmanGutierrez previously introduced H.R. 108-159 ). State Regulatory Aspects

Unlike banks and other financial institutions that are regulated primarily at the federal level, insurers are regulated primarily at the state level. The law was described in congressional testimony (13) as requiring "insurers:
to notify an applicant for insurance if credit information will be used in underwriting and rating;
to notify a consumer in the event of an adverse action based on credit information, includingnotification of factors that were the primaryinfluences on the adverse action;
to re-underwrite and re-rate a policyholder whose credit report was corrected; 
to indemnify insurance agents/brokers who obtained credit information and/or insurance scoresaccording to an insurer's procedures andaccording to applicable laws and regulations;
to file its scoring models with the applicable state department of insurance; such filings are deemedtrade secrets." This proposed study, however, provokedsignificant debate and opposition.
An insurance score, a type of credit score, is a number produced by a computer scoringmodel that analyzes aperson's credit information (i.e., payment history, collections, balances, and bankruptcies) obtained principally fromthat person's credit reports. Increasingly,insurers have been using insurance scores as an underwriting factor to evaluate insurance applications, especiallyfor automobile and homeowners insurance, inpredicting possible future insurance claims an applicant might generate. Insurers maintain that there is a clearstatistical connection between a person'sinsurance score and the likelihood of that person filing claims, as well as how expensive such claims might be. Byusing insurance scores, insurers say that theyare able to charge lower premiums to most customers who are better risks. On the other hand, some consumeradvocates dispute the insurers' position andargue that the use of insurance scores has a disparate effect on minorities, and is merely a new method by whichinsurers can increase premium rates.
Even though credit scores have been widely used for some time by credit-related businesses such as homemortgage lenders and credit card issuers, the use ofinsurance scores by insurers is relatively new. The growing discontent regarding the use of credit-based scoring hasbeen reflected in proposed legislationamending the Fair Credit Reporting Act to require additional consumer protections, and in increased litigation. Insurance scores, like other credit scores basedon credit reports, are regulated to some degree at the federal level. Unlike other credit scores, however, insurancescores used in the underwriting process arealso subject to state insurance laws and regulations. Most of the states have been active in recently reviewing theirlaws and regulations in this area. Federallegislation in the 108th Congress that would have affected insurance scoring included H.R. 1473,H.R. 2796, H.R. 2622,and S. 1753. The latter two were the House and Senate versions of what would become P.L. 108-159, whichmandated a study on the impact ofinsurance scoring. This report will be updated in the event of significant legislative or regulatory developments.