FTC Seeks Input on Credit-Based House Insurance Rates

In 2008, the FTC, in an effort to understand the practices that insurance companies use to set rates for their clients, asked some of the major insurers for information on how they set priorities for coverage.

The FTC has ordered the companies, including Allstate Corp, State Farm, Nationwide Mutual Insurance Co., and Travelers Insurance to provide information about insurance scores that are based on credit. This is essentially the same as a credit rating but instead of focusing on a monetary credit score, the rating is based on how much particular customers are likely to cost their insurance company.

In 2003 Congress asked the FTC to look into the idea of using credit-based insurance scores. In 2007, an FTC study was released that showed that using the scores allowed the companies to charge high risk customers more money. The study also found that Hispanics and African Americans tended to have less favorable scores than Asians and whites and wound up paying more for insurance. Those companies ordered to respond with data have possession of about 60% of the homeowners insurance market in the United States.

Public Invited to Respond

Once the study was commissioned by the FTC, the public was given an opportunity in 2008 to respond to the resolution before the orders were given to the various insurance companies which now had until the 24th of April, 2009 in order to comply with the requested data to the FTC. The Order, Issued on May 16th, 2008 reads in part that it requires “the Commission and Federal Reserve Board to conduct a study, and to submit a report on the study to Congress, of the effects of the use of credit scores and credit-based insurance scores on the availability and affordability of a range of consumer financial products and services.”

Anticipated Results

Given the current economic crisis that began after this study was initiated, the use of the information gleaned from this study will probably find one of several applications. Likely, if the models of using credit in setting insurance rates prove viable and effective, the FTC will take the opportunity to impose regulations for how those rates can be set in the future in order to help insure insurance companies from future loss by allowing them to charge more for higher risks or to refuse some customers outright. With record numbers of Americans suffering from bankruptcy and serious credit issues, however, this could wind up having severe consequences for future homeowners who may find themselves unable to find an affordable insurance policy through private insurance companies. Instead, these individuals may be forced to use public assisted or state-run insurance programs such as the FAIR (Fair Access to Insurance Requirements) program that was put in place by the Kansas Legislature in order to provide insurance for the otherwise uninsurable.

Though the data was due back to the FTC from the insurance companies in late April, it will probably take several months to compile and analyze before any official readings or statement are released to the public.