Could Credit Card Outrage Impact Insurers?

It’s no accident that the National Association of Insurance Commissioners (NAIC), the U.S. insurance industry’s regulators, will hold a hearing tomorrow on the use of “credit scoring.”

The announcement follows closely on the heels of President Obama’s meeting with the executives of banks that issue credit cards at which he told them to stop gouging customers with high interest rates and misleading offers.

Obama read the tea leaves very clearly. In a recession, and with the average American carrying more than $9,000 in high-interest credit card debt, the credit card companies are an easy target for public outrage.

How does this impact insurance companies? Property casualty insurers such as Allstate, Travelers and State Farm  write the policies that cover the cars and homes of these same Americans and use “credit scoring” to decide the rates and whether to offer coverage.

People get lower credit scores when their debt goes up or they don’t pay their bills. This hurts them twice. Not only do they get charged more by the credit card company; they also get hit with a higher insurance bill for their home and car.

Insurers defend “credit scoring” as a valid predictor of claims. For example, if you’re worried about losing your job you are more likely to get into an accident. A home in disrepair, because the owner can’t pay the bills, is more likely to have an electrical fire.

But other valid predictors have been outlawed because they run counter to public policy. One of them was “redlining,” which banks used to decide who got a mortgage. It allowed them to refuse to lend to inner-city residents.

For now, credit scoring is allowed in most states. But the NAIC hearing will be closely watched in Connecticut and Minnesota, where bills are circulating which, if enacted, could either restrict or ban insurers’ use of credit-based insurance scoring. Consumer advocates have long railed against credit scoring as a tax on the poor.

Just how seriously the industry views this threat is seen by the fact that Insurance Information Institute President Robert Hartwig will defend credit scoring at the hearing. He’ll cite information from FICO, which provides predictive analytics to banks and insurers, saying Americans’ credit scores have actually improved as they’ve paid down their debt during the current recession.