The Star-Ledger

Insurers Seek To Set Rates Using Credit Score

Consumer Groups Say Practice Is Biased

The Star-Ledger — Wednesday, April 28, 2004

BY JOE DONOHUE AND BETH FITZ GERALD
Star-Ledger Staff

Five auto insurance companies have asked the state to allow them to use a consumer's credit history to help determine rates, state officials said yesterday.

The practice, known as credit scoring, has been touted by the McGreevey administration as a way to lure auto insurers into New Jersey. Consumer advocates, however, say it discriminates against minorities and the poor. Some have called it "economic redlining."

State regulators last summer allowed the use of credit histories to determine auto insurance rates when granting a license to Mercury General.

The move was part of an overhaul aimed at dealing with a crisis that had left New Jersey with the highest rates in the nation, thousands of people driving without insurance and companies pulling out of the state.

Mary Cozzolino, spokeswoman for the Department of Banking and Insurance, confirmed five more companies have applied to use credit scoring in evaluating auto insurance risks: Metropolitan, AIG, AMICA, Selective and NJ Skylands.

Yesterday, Insurance Commissioner Holly Bakke sent a letter to those companies saying they can use a credit rating if they meet several requirements. Those rules are intended to protect consumers from abuse, Cozzolino said. Under the rules, for instance, no driver can be denied auto insurance solely because they have a poor credit score.

"No evidence has been presented that there is any adverse impact on minorities and low-income populations. That is an unfortunate myth," said Bob Hartwig, senior vice president and chief economist at the Insurance Information Institute, an industry group.

The state's policy, though, was blasted yesterday by consumer advocacy groups.

"Consumers lose and only auto insurance companies win when companies are allowed to charge higher premiums based on a driver's poor credit score," said Maura Caroselli, organizer for New Jersey Citizen Action. "Low-income residents in our state living paycheck to paycheck are more likely to fall into debt, but it doesn't necessarily make them bad drivers."

Last year, Massachusetts regulators denied permission to insurers who sought to use credit scoring. At least 40 other states allow it in some form, New Jersey officials said.

The practice is common with homeowners insurance in the state and is used for other consumer purposes, such as mortgages and car loans, Cozzolino said.

The move could pave the way for Progressive, one of the nation's largest auto insurers, to enter the improving New Jersey market.

"Insurance scoring has proven to be a powerful predictor of future accidents," the company said in a statement. "Since Progressive began using insurance scoring in the early 1990s, it has enabled us to offer lower prices to the majority of consumers."

Bakke said insurers must weigh other factors besides credit histories. Many people in urban areas pay cash and have no credit record, she said. People saddled with big medical bills also often have problems with their credit histories.

"Insurance scoring can never be the sole factor to cancel, deny or nonrenew. It can only be one factor," she said.

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