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Cliston Brown
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Phone:
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202-639-0497
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cliston.brown@pciaa.net
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H.R. 5633 Could Increase Premiums For Many Consumers
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WASHINGTON—
H.R. 5633, which would amend the Fair Credit Reporting Act to prohibit the use
of consumer information in connection with some personal lines of insurance,
could lead to premium increases for many consumers by depriving insurers of one
of the most predictive underwriting tools at their disposal.
Insurers’ use
of credit scoring to price insurance policies makes pricing more accurate and
results in many consumers paying less for their automobile and homeowners’
insurance policies, as numerous studies over the past decade have confirmed
time and again. A study released by the Federal Trade Commission (FTC) in July
reaffirmed the strong connection between credit information and loss risks and
the soundness of using credit scoring to determine rates.
“Credit
scoring is a highly accurate underwriting and rating tool,” said David A.
Sampson, PCI’s president and CEO. “Using this information allows for more
accurate pricing and saves many consumers money on their automobile and
homeowners’ insurance policies. Consumers expect to pay a fair price for their
insurance that matches their individual risk. Insurers simply want to use the
most accurate, statistically valid tools available to achieve that goal. Credit
information has proven to be one of the most accurate methods of predicting
losses.”
The FTC
report’s findings are consistent with earlier studies. Its major conclusions
are as follows:
•
Insurance scores are effective predictors of risk under automobile policies.
They are predictive of the number of claims consumers file and the total cost
of those claims. The use of scores is, therefore, likely to make the price of
insurance better match the risk of loss posed by the consumer. Thus, on
average, higher-risk consumers will pay higher premiums and lower-risk
consumers will pay lower premiums.
•
Use of credit-based insurance scores may result in benefits for consumers. For
example, scores permit insurance companies to evaluate risk with greater
accuracy, which may make them more willing to offer insurance to higher-risk
consumers for whom they would otherwise not be able to determine an appropriate
premium. Since scores also may make the process of granting and pricing
insurance quicker and cheaper, cost savings may be passed on to consumers in
the form of lower premiums.
•
Credit-based insurance scores appear to have little effect as a “proxy” for
membership in racial and ethnic groups in decisions related to insurance.
The relationship between scores and claims risk remains strong when controls
for race, ethnicity, and neighborhood income are included in statistical models
of risk.
This last
point explicitly invalidates the notion that insurers target minorities for
higher insurance rates through the use of insurance scores. The FTC study
demonstrates that by looking at an insurance score there is no way to determine
a person’s race, ethnicity or economic status. People within all racial and
ethnic groups examined in the study have good, average, and bad credit records.
The FTC study reaffirmed this fact. However, a specific high or low score will
offer strong evidence as to the likelihood of that person filing an insurance
claim. Being able to make this distinction regarding risk of loss allows
insurers to charge each individual an appropriate rate. The bottom line is that
insurers underwrite individuals, not ethnic or income groups, and the use of
credit information results in each individual’s premium more accurately
reflecting his risk of loss.
"Numerous studies have validated insurers’ use of
credit scoring as a predictive device,” said Sampson. “We continue to urge a
cooperative approach in which insurers can work with government and other
groups to improve the public's understanding of this and other personal finance
issues."
PCI is composed of
more than 1,000 member companies, representing the broadest cross-section of
insurers of any national trade association. PCI members write over $194
billion in annual premium, 40.1 percent of the nation’s property/casualty
insurance. Member companies write 51.3 percent of the U.S.
automobile insurance market, 39 percent of the homeowners market, 32.1 percent
of the commercial property and liability market, and 38.7 percent of the
private workers compensation market.
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