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Most people know that credit card issuers and banks use an applicant’s credit score to determine whether they will lend money. However, few likely realize that insurance companies use similar scores to determine the risk of insuring someone’s home or vehicle, and the rates they’ll charge for that coverage.

Iowa’s new insurance consumer advocate, Angel Robinson, said one of the first big policy issues she plans to take on is to investigate whether that system is fair to Iowans.

“Consumers may not necessarily know that the fact they have a credit card with a higher balance factors into how much they pay for insurance premiums,” Robinson said. “And if they do, I’ve noticed that there’s a level of acceptance, that consumers believe there’s nothing they can really do to change it. But I’m looking at whether (credit scores) really correspond to how well someone drives a car or how safe a home is.”

Robinson plans to conduct three public hearings this year to gather input on the issue, and detail the results as part of her required annual report to the Legislature at the end of the year.

“I think (credit scoring is) something that creates a huge question mark for a lot of people as to why it’s used in insurance,” she said. “Hopefully I can get a better explanation for why it’s used. I was literally told by one expert that they ‘don’t know why it works; it just does.’ That’s kind of scary, if you can’t explain the connection between how the person’s credit score actually affects the hazards in someone’s driving ability or their house.”

Insurers began using credit scoring about 15 years ago, and it has since become a standard industry practice. A study by the Federal Trade Commission (FTC) in 2007 found that the practice does not discriminate against African-Americans and Hispanics, who in many cases have lower credit scores and thus pay more for automobile insurance.

The Property Casualty Insurance Association of America (PCI), however, says credit scores represent one of the most accurate measures of insurance risk available to the industry. Prohibiting their use would decrease the accuracy of rates and result in people with lower risk subsidizing higher-risk individuals, a PCI spokesman said.

“I don’t know why someone would want to ban something that saves people money,” said Alex Hageli, manager of personal lines for PCI, based in Des Plaines, Ill. Iowa, which is among the top three states for highest average credit scores, has a lot to lose if insurance credit scoring is banned, Hageli said. “I would guess at least half of all people in Iowa receive a discount because of credit scoring,” he said.

Other states acting

Iowa is one of many states that are questioning the use of credit scores by property and casualty insurers. Earlier this month, Michigan’s chief insurance regulator announced that he has begun disapproving, on a case-by-case basis, rate filings by automobile insurance companies that use credit scores as a factor in setting their premiums. The Michigan Supreme Court is currently reviewing an appeal by the insurance industry of a rule instituted in 2005 to ban the use of the scores by insurers.

PCI said it has counted 19 states, among them Connecticut, Florida, Illinois, Kansas and Minnesota, that are considering legislation this year to ban or restrict the use of credit scores by insurers. However, six of those states had already rejected those proposed bans as of mid-March.

From the perspective of the companies, bans or restrictions on credit scoring “would make the assessment of risk much harder, and that makes companies less willing to (provide) coverage,” Hageli said. “If it’s a close call, they’d just rather not rate coverage because they’re conservative. We argue that insurance scoring has greatly increased the availability of insurance.”

The National Association of Insurance Commissioners (NAIC) last week adopted a proposal to review the use of credit-based insurance scoring, with public hearings to be scheduled on the topic. The FTC, which first began studying the issue in 2003, has given nine major insurance companies, among them State Farm Mutual Automobile Insurance Co. and Nationwide Mutual Insurance Co., an April 24 deadline to submit detailed information regarding their use of credit scores in setting auto insurance rates.

Ensuring fair treatment

The Legislature created the Consumer Advocate Bureau within the Iowa Insurance Division a year ago, with responsibility for “ensuring fair treatment of consumers by persons in the business of insurance and for preventing unfair or deceptive trade practices in the insurance marketplace,” according to the legislation creating the bureau. Legislators took this step in part to respond to complaints that the division was not responsive to complaints regarding long-term-care policies issued to seniors.

With the creation of the bureau, Iowa became one of just five states with an insurance consumer advocate, said Robinson, who was appointed by Gov. Chet Culver last fall. She earned her law degree from Drake University Law School in 2007 and also holds a master of public administration degree from Drake. Prior to her appointment, she worked on the staff of the Iowa Coalition to Prevent Domestic Violence.

“I look at the Consumer Advocate Bureau as Iowa’s representation in insurance both individually and generally,” Robinson said, “whether it’s one person who has a problem with their insurance company or the public as a whole that’s suffering from bad policy positions.”

The insurance division responded to more than 30,000 consumer inquiries in fiscal 2008 and investigated more than 1,800 written complaints. The division recovered nearly $2 million in funds for consumers related to those complaints.

Consumer education will be a large part of her responsibilities, said Robinson, a California native who grew up in West Des Moines. For instance, she’s providing educational seminars this month about the National Flood Insurance Program as part of Flood Insurance Awareness Month. Products marketed to seniors will be another key area.

“I think when it comes to (insurance) products, the best tool that I have is in outreach and education, especially for those products that are marketed towards seniors,” she said. “Those are your long-term-care issues, your annuities and your life (insurance) issues, all products marketed toward seniors but that tend to have complications. The more informed the consumer is, the better decisions they can make.”

Robinson will also review closed consumer complaints for cases in which the person feels his or her issue has not been adequately handled or requires further action.

“Consumers who have gone through the complaint process and have not been satisfied with the resolution of the complaint are able to give me a call and have me take a second look at it,” she said. After four months on the job, she’s handled just a handful of complaint reviews so far, she said.

Given the state’s budget shortfall, Robinson said her budget request of $203,660, most of that to fund a staff of three people, represents “an extremely modest, gradual building of the Consumer Advocate Bureau.” Robinson’s requested salary for fiscal 2010 is $77,700.

“As far as I know, I will not be given any assistance (with funding for staff) this year,” she said. It’s possible her position may not be funded, in which case her salary would come out of the insurance division’s general fund, she said. For now, “it’s just me, which is why I’m a very busy woman.”

Though Robinson said she may recommend legislation on credit scoring and other policy issues to legislators next year, the only substantive change she’s requesting this session is an amendment to the omnibus insurance bill to clarify her authority to consider complaints involving securities and regulated industries.

“So I’ve taken a pause in consumer assistance in securities and related industries, but I look forward to being available to those individuals in the future,” she said.