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Holden says some are insurance victims. Missouri Gov. Bob Holden pressed Thursday to ban insurance companies from setting rates based on credit scores, which he says disproportionately harm low income and minority policyholders.

The full article will be available on the Web for a limited time: http://www.kansascity.com/mld/kansascity/business/7830018.htm (c) 2004 Kansas City Star and wire service sources. All Rights Reserved. Below is the article that the link above refers to.

Posted on Fri, Jan. 30, 2004------------------------------------------------------------------------

Holden says some are insurance victims
By PAUL WENSKE
The Kansas City Star

“The concern is that credit scoring is unfairly penalizing low-income citizens with inflated insurance prices, with much of the burden falling on African-Americans and Hispanics with higher insurance prices.”
Missouri Gov. Bob Holden

Missouri Gov. Bob Holden pressed Thursday to ban insurance companies from setting rates based on credit scores, which he says disproportionately harm low income and minority policyholders.

Holden and Missouri Insurance Director Scott Lakin released a study in Kansas City that they say shows insurance companies are charging low-income and minority groups in urban and rural areas of the state higher car and home insurance rates.

The state study was based on information from the 20 largest automobile and homeowners insurers in Missouri for the period of 1999 to 2001.

Insurance officials were quick to rebuke Holden for what they claimed was political grandstanding, and to dispute the Department of Insurance's report as flawed.

At a news conference at the Bruce R. Watkins Cultural Heritage Center, Holden said, “The concern is that credit scoring is unfairly penalizing low-income citizens with inflated insurance prices, with much of the burden falling on African-Americans and Hispanics with higher insurance prices.”

“This places unnecessary obstacles in the way of many people and many communities that are struggling to move forward,” the governor said.

Credit scoring is a controversial underwriting tool that relies on computerized profiles and assigns a numeric score to consumers based on their credit histories, including any outstanding debts, ability to repay debts on time, amounts of credit and loan defaults.

Debate over credit scoring has raged in nearly all 50 states. Last year Kansas passed limited restrictions on credit scoring, which went into effect in January. Missouri had already passed a law limiting insurers from setting rates and denying coverage based solely on credit scores.

But Lakin said that restriction does not limit insurers from using credit scores to charge prohibitive prices for insurance. So far, only California and Maryland have banned credit scoring.

Many insurers insist there is a strong correlation between people who repay their debts on time and the number of car accidents they have and home insurance claims they file. They say people with higher credit scores are better risks and deserve better rates.

But critics challenge the argument that better credit makes people better drivers or means they are less apt to file a claim for hail damage.

The Missouri study examined credit scores by ZIP code. On a percentile basis, it found that the credit scores of residents in largely minority ZIP codes stood at 18.4 out of 100. That compared to 57.3 in nonminority ZIP codes.

The study also reviewed credit scores based on income.

It found that residents in the lowest-income areas, mainly in inner cities and rural counties, averaged scores that were 12.8 percentile points lower than the wealthiest ZIP codes.

Holden maintained that these disparities resulted in many residents being unable to afford insurance. With more uninsured motorists on the road, governments and insured motorists must bear more of the costs associated with accidents.

Calvin Call, executive director of the Missouri Insurance Coalition, a state insurance trade group, accused Holden of politicizing race and poverty to gain publicity at a time when polls show he would face a tight re-election race.

Call contended that credit scores were widely accepted as accurate underwriting tools. He said credit scores were blind to race and income.

“Neither race nor income are ever known by the groups that gather that information,” Call said.

Lakin defended the insurance study, which he said was the first major independent study in the nation to draw conclusions on whether credit scoring had a disparate impact on low-income and minority residents who often face obstacles getting insurance.

“This is a flawed system,” Lakin said. “If you have a low credit score, it does have an effect on getting insurance,” he said.

He said the study suggested that low-income and minority residents faced more financial challenges that affected their credit ratings.

“Insurance companies don't look at the underlying causes,” he said. “They target those who are financially stressed, not those who have been financially responsible.”

Insurance officials outside Missouri refuted the study, saying other research, mainly conducted by insurance-related groups, have already proved the effectiveness of credit scores. They said those studies found that wealthy residents were hit as much as low-income ones.

“There is no doubt whatsoever that lower scores are highly correlated to higher losses,” said Robert Hartwig, chief economist for the Insurance Information Institute, a national trade group. “There's no serious debate any longer about it.”

Hartwig said a rise in home ownership rates countered the findings of the Missouri report.

“What they (Missouri officials) are saying is that African-Americans and Hispanics are not capable of building or sustaining good credit ratings and must be protected.

“The truth is that more African-Americans and Hispanics are building a better credit score and using that to buy a home,” Hartwig said.

Even so, Bob Hunter, director of insurance for the Consumer Federation of America, defended the Missouri findings.

“There is no supporting thesis that people who have worse credit are worse drivers or worse homeowners,” he said.

“Use your head, it's clear people in tight financial situation are more apt not to pay their bills on time and are more apt to use their limits,” Hunter said.“Do you think rich people have the same problem that poor people have paying their bills?”

Lakin acknowledged some limitations to the study.

For example, it doesn't pinpoint reasons why minorities and low-income individuals have low credit scores, nor does it provide actual monetary differences in rates paid by minority and low-income residents compared with other residents in the state.

He said some of these limitations would be included in a larger multistate study that the Missouri Department of Insurance was conducting with more than a dozen of other states.

Diane Charity, who lives in the 18th and Vine area of Kansas City and is an aide to City Councilman Terry Riley, told reporters that the quotes she received for car insurance were so high that she has chosen to go without insurance for more than four years.

The Rev. Wallace Hartsfield, a Kansas City pastor, said many of his parishioners face insurance problems and some are leaving the area to find better deals.

“This deals with the actual destruction of the community,” he said.

To reach Paul Wenske, consumer affairs reporter, call (816) 234-4454 or send e-mail to

pwenske@kcstar.com.
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First glance

• Missouri Gov. Bob Holden seeks to ban insurance companies from setting rates based on credit scores.

• Insurance officials chastise Holden for what they claim is political grandstanding.

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© 2004 Kansas City Star and wire service sources. All Rights Reserved.
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