WASHINGTON–The reliability and appropriateness of using creditscores to rate insurance customers came under fire by a HouseCommittee yesterday.

Questions about the process by members of a House FinancialServices Subcommittee followed a Federal Trade Commission Reportthat found credit scores to be an accurate predictor of loss riskfor auto insurance, but also potentially discriminatory.

“Our objective is to shed light on the growing, but oftenhidden, use of credit information in the pricing and underwritingof insurance and to start analyzing, discussing and determiningwhether that is fair or whether it even makes sense,” said Rep. MelWatt, D-N.C., the chairman of the Financial Services Subcommitteeon Oversight and Investigations.

Rep. Watt noted that consumer groups have questioned the FTC'smethodology in crafting its report, noting that it was compiledonly from information volunteered by insurance companies oravailable publicly.

It has also been suggested that the finding concerning adiscriminatory effect might be more severe if the commission wereable to look at more complete data. Additionally, Mr. Watt notedone of the FTC commissioners had dissented from the report.

J. Thomas Rosch, a commissioner with the FTC, defended thereport's findings, noting that its conclusions were supported by asimilar study done by the Texas Department of Insurance, “whosemethodology was what critics said should have been used by thecommission.”

In fact, Mr. Rosch noted, the information regarding ethnicitywas not collected from insurers, who do not maintain records ofthat information, but from the Social Security Administration, theCensus Bureau, and a firm that screens for Hispanic surnames.

Rep. Watt, along with full Financial Services Committee ChairmanBarney Frank, D-Mass., and Rep. Luis Gutierrez, D-Ill., had writtena letter to the FTC requesting that it use its authority to compelinsurers to provide data as the commission conducts its next studyexamining the use of credit scores in homeowners insurance. Mr.Rosch said that the FTC intends to do so.

However, Rep. Watt noted that the FTC has said compellinginsurers to provide data would extend the time needed to completetheir study by two to three years, and wondered if the added timewould produce a report that would be perceived by critics as anymore reliable than the report on auto lines.

Birny Birnbaum, executive director of the Center for EconomicJustice, questioned both the methodology of the study as“fundamentally flawed” and the premise of insurance scores beingpredictive of loss.

As an example, he noted that insurance scores can be manipulatedby consumers looking to improve their credit scores. “How can thatbe an effective rating factor when you can manipulate your score?”he asked.

Rep. Watt said his concern was what he called the “common sense”question of “if I get my credit score up, would it make me a betterdriver?” Additionally, he wondered if the report's finding that lowincome and minority consumers are negatively affected by creditscoring means that those consumers are somehow worse drivers.

Rep. Maxine Waters, D-Calif., expressed significant concern overthe potentially discriminatory impact of insurance scores.

Mr. Rosch had argued throughout the hearing that the reportsimply noted the potential impact and was intended simply to informpolicymakers who could respond to it, but Rep. Waters argued thatrecent material crafted by the FTC aimed at helping minoritiesraise their credit scores to obtain better insurance rates was atacit acceptance of the discrimination.

“You do take a position, in the way that you decided to handleyour so-called consumer education,” she said.

Mr. Rosch responded that “we are not in a position to saywhether that is right or wrong, because that is a policy decisionto be made by the states.”

One of the panel members, ranking minority member Gary Miller,R-Calif., defended the use of credit scores, noting that severalreports have found them to be a significantly useful tool forgauging risk, adding that he didn't see the need to determinewhy.

“The question was asked, and you based your answer on all theavailable data that existed,” he said, adding “I don't know whygravity's there either, but it is.”

On the issue of the states, Rep. Watt said in his openingremarks that he supported the work being done in states on creditscoring issues, and the role of states in regulating insurance.

“States have historically regulated and controlled insurance andhave historically been the so-called 'legislative and regulatorylaboratories for innovation,'” he said. “State insurance regulatorsare the best equipped to regulate insurance credit scoring andshould continue to do so.”