Insurers cry politics in bill that would limit use of credit data. (Up Front).

The insurance industry is up in arms over a bill that would prohibit the growing practice of using credit information to set premiums and to determine whether to offer insurance to drivers and homeowners.

But a more intriguing question is whether the bill's sponsor, failed insurance commissioner candidate and Assemblyman Tom Calderon, D-Montebello, still plans to stand behind it.

Calderon, who as chairman of the Assembly Insurance Committee is considered a moderate, pro-business Democrat, has been pushing AB 5, to the delight of consumer advocates.

But the Foundation for Taxpayer and Consumer Rights, the group that wrote Proposition 103, the automobile insurance reform measure, questions his motivation.

The bill was significantly strengthened just a week before the March 5 primary--at a time when Calderon faced intense criticism for accepting over $1.5 million in contributions from the insurance industry.

"The question is whether he strengthened the bill merely for politics or he will follow through and fight for consumers," said Doug Heller, a consumer advocate with the Santa Monica-based foundation. "If he was willing to push a strong bill when he was running, he should be willing to do it now."

Heller said he is concerned about the bill because the assemblyman has not always signaled the "clearest message."

Calderon isn't talking. He did not return repeated calls for comment. A spokesman later said he was on a family vacation.

But Michael Mattoch, chief consultant to the insurance committee who worked on the bill for Calderon, denied that the assemblyman plans to let the bill die. "We are still trying make it as tough as can be, and be something the governor will sign," said Mattoch.

As practiced by the industry, insurers will run an applicant's credit report and then feed the information into a computer model that assigns a rating to it.

Insurers say that consumers with late credit card payments, bankruptcies and other credit blotches are more likely to file auto and homeowner claims. But consumer advocates say the practice simply discriminates against low-income consumers who may be excellent insurance risks.

Changing legislation

Calderon has questioned any link between credit rating and insurance risk, but his actions have been erratic.

The legislation was originally introduced in December 2000 as an all-encompassing ban on the use of credit ratings to price premiums for any type of insurance policy. But that prompted massive opposition from the insurance industry, which complained the language could prohibit using credit information to determine whether customers qualify for extended payments.

The bill was watered down in April 2001 to prohibit consumer credit information from being the sole reason behind a company's refusal to write an automobile insurance policy.

The industry threw its support behind the bill, but consumer advocates protested that it was practically memingless. Under Proposition 103 insurers already are banned from using credit information in considering applications from so-called "good drivers," a rating that 80 percent or more of the state's drivers qualify for.

"That was a little too watered down," admitted Mattoch. "But it was the only one we could get through our house and limit opposition."

The amendments got the bill through the Assembly on May 24, 2001, where it sat until Feb. 28 when Calderon, in the midst of the commissioner's race, amended it to its current form, again sparking industry concern.

As it now stands, the measure would prohibit the use of credit information or ratings to set premiums and make underwriting decisions for auto and homeowners insurance. However, it would not regulate commercial insurance.

While the use of credit information in auto insurance is largely regulated by Proposition 103, there are loopholes. Specifically, insurers can use credit information as a factor in determining whether to offer insurance to high-risk drivers who do not qualify for the "good driver" discounts. (It can't be used to set rates.) Moreover, there is no regulation regarding its use in rating premiums or underwriting homeowners insurance.

Sam Sorich, the West Coast vice president for the National Association of Independent Insurers, defends the practice of using credit information, which he said has grown with the development of credit-rating models that could accurately predict claim losses. "Our members have found that credit information is a good, reliable predictor of whether or not a person will have an insured loss," he said.

The industry is unclear why the model works in auto insurance, but there are theories that individuals who are careless with their credit may have "risk-taking" personalities that carry over into driving. "That may be the same person who when the light turns amber will try to go through an intersection," Sorich said.

The stress theory

Other theories are that credit problems cause stress, which can distract drivers. As for homeowners, poor credit may indicate financial problems that might prevent an owner from carrying out house repairs, such as fixing plumbing that might later produce a major claim.

Not all insurers employ credit ratings in California, especially with automobile insurance, which is so tightly regulated by Proposition 103.

Allstate Corp. only uses it to price homeowners insurance in California. And Farmers Insurance Group and State Farm Insurance Cos., which use credit history for auto and homeowners insurance outside the state, don't use it at all in California.

Bruce Norman, senior vice president of marketing for Mercury General Corp., which offers both auto and homeowners insurance in California, said the company does not employ credit ratings.

"(Other companies) don't do what we would call traditional underwriting, where you would verify information on an application. Instead, you run them through a computer and if the score is right you underwrite and if not you don't," he said.

In contrast, Mercury will verify loss history through previous insurers and even inspect vehicles for damage. Norman said the company believes its method is superior in predicting claims.