FTC Seeks Consumers' Comments On Proposed System To Develop Credit-Based Homeowner Insurance Rates

I often write about the U.S. Federal Trade Commission (FTC), since its activities directly affects us (and our wallets or purses). Prior posts covered the FTC's annual analysis of identity theft and its proposed rules for behavioral advertising, which could affect your Internet usage and privacy. Currently, Congress has required the FTC to study ways to base homeowners insurance rates on credit-based insurance scores.

Yes, you read that correctly. The FTC is studying ways to base your homeowner insurance rates on your financial and credit information. This study was mandated by Section 6(b) of the FTC Act and Section 215 of the Fair and Accurate Credit Transactions Act (FACTA). I've Been Mugged readers know that insurance companies already based property insurance rates on C.L.U.E. reports, that compile consumers' auto and homeowners insurance claim histories.

In 2007, the FTC studied ways to for credit-based auto insurance rates. Some key findings from that July 2007 auto insurance study:

1. Scores effectively predict the number of claims consumers file and the total cost of those claims. Their use is likely to make the price of insurance better match the risk of loss that consumers pose. Thus, on average, as a result of the use of scores, higher-risk consumers pay higher premiums and lower-risk consumers pay lower premiums.

2. Use of scores may result in benefits for consumers. For example, scores permit insurers to evaluate risk with greater accuracy, which may make them more willing to offer insurance to higher-risk consumers for whom they otherwise would not be able to determine an appropriate premium. Scores also may allow insurers to grant and price coverage more efficiently, producing cost savings that could result in lower premiums. Little empirical data was submitted or available to the FTC that would allow the agency to quantify the magnitude of these benefits.

3. Scores are distributed differently among racial and ethnic groups, and these differences are likely to have an effect on the premiums that these groups pay, on average.

4. As a proxy for race and ethnicity in statistical models of insurance, scores have a 1.1 percent and 0.7 percent effect for African-Americans and Hispanics, respectively. This means that most of their predictive power is not as a substitute for membership in racial or ethnic groups. In addition, scores effectively predict risk of claims within racial and ethnic groups.

5. The Commission could not develop an alternative scoring model that would continue to predict risk effectively, yet decrease the differences in scores among racial and ethnic groups.

From the auto insurance study, finding #1 above seems more focused on "risk" rather than "actual claims," which suggests that insurance companies can base auto rates on what they think your risk is, not your actual risk based on claims. Plus, there are a lot of "maybe's" in #2 above. This seems to be a big win for industry and not much of a benefit for consumers.

If this insurance study seems odd to you, it should. One would expect insurance rates to be based on you claim history and not your finances. Companies seem intent on changing this traditional approach. If you are concerned, I strongly encourage you to submit a comment to the FTC. The deadline for submissions is June 18, 2008 -- 2 weeks from today. You can submit comments via postal mail to:
Federal Trade Commission
Office of the Secretary
Room H-135 (Annex C)
600 Pennsylvania Avenue, N.W.
Washington, DC 20580
Be sure to include “Credit-based Insurance Score – Homeowners Insurance – P044804” on both your letter and the envelope.