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Agents in Massachusetts are so dead set against allowing insurers to use consumers' credit histories in setting auto premiums that they are taking two separate paths toward outlawing it.

The Massachusetts Association of Insurance Agents (MAIA) launched an effort earlier this month to put a measure prohibiting the practice on the 2012 ballot, despite already backing a Senate bill with the same goal.

"Using these factors to set auto rates is simply unfair, discriminatory and unreliable," MAIA President Frank Mancini says in a statement. "Allowing these factors to be considered will result in increased rates for those Massachusetts drivers who can least afford it."

Nationwide controversy over credit scoring

The MAIA announcement drew criticism from insurers. It also reignited a simmering debate over the fairness of using information such as a person's past delinquencies, bankruptcies or late payments to determine how cheap auto insurance will be for a policyholder - a practice often referred to as "credit scoring" or "insurance scoring."

Whatever you call it, it's been a source of contention nationwide for more than a decade. Insurers claim that analyzing personal credit information helps them better predict risk and more accurately price policies, while consumer groups and other critics maintain that it disproportionately punishes low-income Americans and minorities.

"I think the reason it's contentious is that many drivers feel as though there is no correlation between the way they handle their personal finances and their ability to be a responsible driver," says Michael Barry, a spokesman for the Insurance Information Institute (III). "What (insurers) would say is that this is just one of the many variables that go into pricing an auto insurance policy."

"Credit scoring has become a regular rate-setting practice in most parts of the country," says http://www.onlineautoinsurance.com/CEO Cesar Diaz. "And it can significantly affect premiums. In Nevada, for example, going from the best possible credit score to the worst possible could increase average premiums by 75 percent."

Only one state, Hawaii, has completely banned the use of credit reports for underwriting and rating, although two other states - Massachusetts and California - have significant restrictions, according to III.

California does not allow the use of credit data unless it is specifically allowed by state regulators, and an administrative rule already prohibits the practice in Massachusetts.

The state's top regulator has vowed not to overturn that regulation, but that is not enough protection for MAIA officials, who launched their ballot initiative "to cover all the bases," according to spokesman Daniel Foley.

The issue of credit scoring was taken up by courts or legislatures in more than a half-dozen states in 2011. Last year, at least 27 bills aimed at curtailing the use of credit scores in pricing coverage were introduced to state legislatures, according to III.

And nearly all states have rules governing how credit information can be used, according to III.

Still, the debate over credit scoring goes on.

Reports show credit histories do help predict risk

Insurers argue that personal credit data helps them assess the risk that a driver will get into an accident and file a claim. This information in turn helps them set premiums.

People with poor credit are statistically more likely to file claims, according to III.

Insurers say that, when combined with other factors - such as where a policyholder lives, driving record, age and gender - credit scoring allows them to price policies so that those who are less likely to file claims pay lower rates and higher-risk policyholders pay more.

Critics, meanwhile, say that the scoring method is inherently discriminatory, with the highest rates being foisted on those who are least able to pay and certain ethnic groups suffering more so than others.

A 2004 report by the Texas Department of Insurance stated that African-Americans and Hispanics made up only single-digit percentages of the policies classified under the best credit score range but nearly one-third of the policies in the worst range.

Even the Federal Trade Commission has been unable to find a resolution to the credit-scoring debate.

In a 2007 report, the FTC stated that credit scoring is "likely to make the price of insurance better match the risk of loss posed by the consumer."

But the federal agency could not determine exactly how the practice lessened risk and indicated that black and Hispanic people are rated as higher risks under credit scoring.

Barry says the III - a nonprofit organization that receives funding from the coverage industry - has found credit scoring to be "a very predictive rating criterion."

But don't expect the arguments over the practice to die down any time soon in states such as Massachusetts, Barry says. 

Courtesy: lvrj.com

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