The roar over credit scores: insurance companies love credit scoring, but consumer groups question who benefits from them. Legislators are looking at restrictions.

• Author: Boulard, Garry

For insurers it seems like the perfect system a way to significantly reduce possible claims in a hard market made all the worse by the continuing effects of 9/11.

It's called credit scoring. And it is a process that claims to be able to predict, not the premium-paying potential for would-be insurance customers, but rather the likelihood of their having accidents and filing claims based, uniquely, on their past credit history.

"Insurers are always looking for the best ways to reduce risk. Credit scoring is that, a very important measurement tool," says David Snyder, assistant general counsel with the American Insurance Association in Washington, D.C. "And it is also a way that has been proved to have a very high correlation to future claims.

"This is a tool that focuses much more on individual risk and less on the old categories such as territory and age," he says. "It is very much moderated by individual factors, which means that it adds a lot of value and benefit to who is likely to have a claim in the future and who isn't."

THE CASE AGAINST CREDIT SCORING

Consumer advocacy groups, however, view credit scoring through a different prism. They argue that just because a system works for the insurance companies doesn't necessarily mean it works well for those with faulty credit records who are in treed of insurance.

"Credit scoring has any number of downsides," says Birny Birnbuam, executive director of the Center for Economic Justice in Austin, Texas. "It is inherently unfair, it penalizes people who are the victims of medical and economic catastrophes, and it does so in an entirely arbitrary fashion that ends up being more a predictor of possibilities, but not really, as the insurers say, of risk.

"The truth of the matter is that although the insurance industry likes to portray credit scoring as rewarding good financial managers, your credit history is in no way a measure of your financial responsibility nor of your likelihood of having an accident and filing a claim," Birnbaum says. "The only thing that credit scoring can really do is penalize people who may have had something bad happen in their life."

Increasingly for state lawmakers the task has become how to reconcile such dramatically opposing takes on a system that, by almost anyone's measurement, is confusing, mysterious, and--in an era when the vast majority of insurers employ some form of credit scoring--omnipresent.

Credit scoring has been around for decades; it was invented by a California firm called Fair, Isaac & Company in the 1950s. But it wasn't until the late 1990s that most U.S. insurance companies, worried about increased competition and ever-growing claims, began to embrace the concept.

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