Credit linked to insurance eligibility State bureau plans to investigate issue

AUGUSTA – Most Mainers are aware that various credit rating services can have an impact on their ability to borrow money, but many may be surprised that their bill-paying history also is being used by insurance companies to determine coverage eligibility and premiums.

“Yes, it has been happening in Maine for a few years now,” said state Deputy Insurance Superintendent Judith Chamberlain.

But the so-called “credit scoring” has a growing number of critics. Maine has no rules or state laws directly regulating the use of credit scores in insurance rates. However, the state Bureau of Insurance has launched an investigation of the practice.

The issue has been drawing more attention nationally this year, with a number of state legislatures considering proposals to regulate the use of credit ratings by the insurance industry. In Maryland, Gov. Parris Glendening signed legislation last month outlawing some uses of credit scoring and curbing others.

“The states have to get out front on this issue,” said J. Robert Hunter, the insurance director for the watchdog group Consumer Federation of America. “What the insurance companies are doing here is ridiculous and, more importantly, it is unfair.”

Hunter said the insurance industry strongly opposed the Maryland legislation, but it was enacted after an independent study by Maryland insurance regulators found little correlation between a person’s credit history and whether he should get insurance coverage or how much he should pay for that coverage. The study did find that the use of credit scoring unfairly penalized low-income consumers, minorities and people who prefer to pay in cash.

“You can understand why insurance might cost more in Portland, with greater traffic density than, say, in Rangeley,” Hunter said. “But I have never been able to get an explanation as to why if you have a poor credit rating because you don’t use credit cards, why that should have an impact on what you should pay for insurance or whether you get it at all. It just makes no sense.”

Hunter, who lives part of the year in Maine and part in Virginia, said he expects many Mainers will be very surprised at the use of their credit rating to determine the cost of their home or auto insurance.

“We have studies that indicate 70 to 71 percent of consumers benefit from the use of credit scoring,” said Michael Moran, spokesman for the American Insurance Association, a national trade group. “We feel the Maryland law is a bad mistake that will cost consumers and such a law in Maine would hurt Maine consumers.”

Moran said several studies indicate there is a correlation between creditworthiness and whether a person is a good risk for insurance companies. He said the actual mathematical formulas used in the credit scoring process are different for each company and are the property of those firms.

“I cannot tell you how they work because the formulas are proprietary, but they do. The proof is there,” Moran said.

He did acknowledge that there are situations in which an individual does not have a credit rating because he chooses to pay in cash and that could pose a problem. But, he said while he cannot speak for all insurance companies, most only use credit scoring as one tool in determining insurability and rates and not as the only method of setting rates or eligibility for coverage.

“I don’t buy that and they didn’t buy that in Maryland,” Hunter said. “That’s why they passed the law in Maryland.”

There are also concerns over the accuracy of the underlying credit reports used by insurers in their credit scoring process. Will Lund, director of the Maine Office of Consumer Credit Regulation, wrote an article recently for the Federal Reserve Bank of Boston criticizing the use of credit scores in determining creditworthiness.

“Yes, there are problems with the scores,” he said. “As I pointed out in the article, there are errors and I think their use is a step backward from the goals of the Fair Credit Reporting Act.”

Lund said he does not know enough about how the scores are used to determine insurability or insurance rates to comment directly on their use by insurance companies. But, he said, he is convinced the scoring process itself is flawed when it comes to determining credit.

Moran said insurers are convinced current federal and state laws are adequate in protecting consumers from errors in the files of the various credit reporting agencies. Lund disagrees.

Chamberlain said her office is still reviewing how the credit scoring is being used by insurers in Maine. She said there has been an increase in complaints about higher insurance rates that her staff has traced to credit scoring.

Because of state confidentiality laws, however, she could not be specific about the individual complaints.

“We do have concerns about this and we are looking at whether regulations are needed or even a change in law,” she said. “And the superintendent has directed me to give this high priority.”

Chamberlain said a target date to finish the review has not been set, but she expected it would be completed later this summer.