Credit Scores: Credit-Based Insurance Scores (CRS Report for Congress)
| Release Date |
Jan. 19, 2005 |
| Report Number |
RS21341 |
| Report Type |
Report |
| Authors |
Government and Finance Division |
| Source Agency |
Congressional Research Service |
Summary:
An insurance score, a type of credit score, is a number produced by a computer scoring model
that
analyzes a person's credit information (i.e., payment history, collections, balances, and bankruptcies)
obtained principally from that person's credit reports. Increasingly, insurers have been using
insurance scores as an underwriting factor to evaluate insurance applications, especially for
automobile and homeowners insurance, in predicting possible future insurance claims an applicant
might generate. Insurers maintain that there is a clear statistical connection between a person's
insurance score and the likelihood of that person filing claims, as well as how expensive such claims
might be. By using insurance scores, insurers say that they are able to charge lower premiums to
most customers who are better risks. On the other hand, some consumer advocates dispute the
insurers' position and argue that the use of insurance scores has a disparate effect on minorities, and
is merely a new method by which insurers can increase premium rates.
Even though credit scores have been widely used for some time by credit-related businesses
such as home mortgage lenders and credit card issuers, the use of insurance scores by insurers is
relatively new. The growing discontent regarding the use of credit-based scoring has been reflected
in proposed legislation amending the Fair Credit Reporting Act to require additional consumer
protections, and in increased litigation. Insurance scores, like other credit scores based on credit
reports, are regulated to some degree at the federal level. Unlike other credit scores, however,
insurance scores used in the underwriting process are also subject to state insurance laws and
regulations. Most of the states have been active in recently reviewing their laws and regulations in
this area. Federal legislation 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 , which mandated a study on the impact of insurance scoring. This report will be updated
in the event of significant legislative or regulatory developments.
