State Rep. Rich Golick learned a decade ago that the insurance industry had discovered a new crystal ball.

By shuffling a customer’s debt and bill-paying records through a complicated computer program, insurers believed they could predict with amazing accuracy which customers were most likely to get into an auto accident and file a claim.

The computer program boiled each customer’s history down to a new version of a credit score and called it an “insurance score.” Customers with bad scores were bigger risks than customers with good scores, insurers said, so it was only fair that their policies cost more.

Like most people, Golick couldn’t then — and can’t now — explain the connection. Why would information about credit card bills and mortgage payments predict someone’s driving habits?

“I work in this business. It is not obvious to me,” said Golick, who in addition to his legislative job is an attorney for Allstate Insurance Co. “I do know that the data is conclusive that there is absolutely a correlation.”

The mysterious correlation was so strong that it prompted Golick, who handles regulatory matters for Allstate’s Southeast region, to take action. In 2003, he sponsored legislation that allows insurers to use credit information when pricing auto and homeowners insurance — but keeps the formulas they use secret from consumers.

The Smyrna Republican did so despite concerns of consumer advocates, many insurance agents and Georgia insurance regulators, who believe the practice punishes people who are poor or otherwise down on their luck.

As a result of Golick’s bill, which sailed through the General Assembly, Allstate and most major insurers in Georgia today consider credit history among the most important factors in determining how much consumers pay for their insurance.

An Atlanta Journal-Constitution review of public filings by the state’s largest insurers found that the companies routinely charge customers with the worst insurance scores about double the price offered those with the best scores, even when all other factors, including driving records, are the same.

For example, Drive Insurance from Progressive would charge a 40-year-old Atlanta man with a 2000 Ford Taurus and a clean driving record $387 for a six-month policy if he had the best insurance score, compared with $710 if he had the worst.

At some insurance companies, a terrible credit report can prove as costly as a drunken driving conviction.

But many customers are hard-pressed to know the extent to which their credit report is driving their premium costs. Consumer advocates say many insurers issue confusing notices to policyholders about how credit information comes into play.

And since Georgia law allows insurers to keep secret the computer models that produce the scores, it’s difficult for consumers to know exactly how to improve their status.

“It is a black box,” Georgia Insurance Commissioner John Oxendine said in a recent interview. “We don’t like that.”

The insurance industry has exercised its considerable clout to win acceptance of the practice nationally. In only two states — California and Massachusetts — is credit history kept out of both auto and homeowners insurance premiums. But the practice continues to be controversial.

In 2003, amid concerns that insurance scoring discriminates against certain groups, Congress charged the Federal Trade Commission with determining the practice’s effect on women, the elderly and minorities. The agency’s report is expected soon.

As insurers cull increasing reams of data for even more characteristics to gauge who will file claims and cost them money, the debate could get even hotter. Some insurers want to use a customer’s occupation and education level as predictors of risk, saying that blue-collar workers with high school diplomas are more likely to file claims than professionals with advanced college degrees.

Oxendine generally opposes these factors, saying the use of occupation as a factor harks back to a period when African-Americans were charged higher premiums. He also said he is uncomfortable with the use of credit information, and wants to know why the numbers work — especially since state law requires that Georgia drivers buy car insurance.

“If you can’t explain it to me, how am I supposed to accept it?” he asks.

Oxendine had restricted the use of credit information in pricing policies. After Golick’s bill became law, Oxendine beefed up consumer protections, including prohibiting insurers from scoring most of their existing customers.

“If there were a bill to repeal it, I’d be inclined to support it,” Oxendine said.

A spirited defense

Golick, first elected to the General Assembly in 1998, says no one has passed more pro-consumer legislation in the past eight years than he. He is especially proud of a 2002 bill closing a loophole used by several life insurance companies to charge black customers more for certain policies.

“I am not trying to beat my chest or anything, but as it relates to discrimination and insurance pricing, there is no one in this building who is more credible on this than I am,” said Golick when interviewed recently in his office at the state Capitol.

Three years ago, Golick sponsored legislation allowing the use of credit in pricing insurance because, he said, it was the right thing to do. Although virtually every major consumer group objects to the practice, Golick called his legislation pro-consumer.

If insurers have information that better predicts risk, Golick said, “then morally it almost has to be used. Because if it is not used, then you have some people paying more than they should.”

Insurers say that consumers with good credit have seen their premiums go down, but they can’t say how many or by how much. They say premiums would go up and riskier drivers would be denied coverage if the use of credit information were banned.

Golick serves as Gov. Sonny Perdue’s floor leader, but points out that he was a junior member in what was then a Democratic-controlled House when he introduced his insurance scoring bill. The fact that it passed overwhelmingly in both chambers — only four members voted against it — speaks to its legitimacy, Golick said.

As confident as Golick and many insurers are of the link between credit history and insurance claims, they can only hazard a guess as to why. Some theorize that drivers get distracted by their financial woes and crash their cars. Others say people drive the way they pay their bills.

Critics of insurance scoring, who say the practice hits poor people hardest, have hunches of their own. Some consumer advocates believe that people with credit problems file more claims because they can’t cover minor accidents out-of-pocket.

Golick has his own theory, based on his contention that credit history does not speak to how much money consumers make, but how they manage their finances.

“I am not going to play armchair behavioral psychologist,” Golick said. “But it is potentially not unreasonable to say that the same person who maxes out their credit card to go buy a

WaveRunner before paying their electrical bill may — may — be the same person who is going to swing over six lanes of traffic on the Connector not to miss his or her exit,” he said.

As for the absence of a clear link between credit and claims? “At some point, we ask ourselves, does it matter?” Golick said.

It matters to people like Angie Jackson, who received unsually high quotes while shopping around recently for auto insurance. To this day, the 43-year-old DeKalb County real estate agent is unclear what insurers do not like — her ZIP code, her credit history or two accidents in 2002 and 2003.

“They don’t tell you why they are giving you the rate they are giving you,” she said.

Jackson doesn’t think her credit report, which she said is less than perfect but also contained some errors, should have anything to do with what she pays for insurance. “I think they should go by your driving record,” she said.

Cause or coincidence?

The mere existence of a link between credit history and claims filed, critics of insurance scoring say, does not mean that one necessarily has anything to do with the other.

“You could correlate a million different things, like, I don’t know, education level, whether you are left-handed,” said Cathey Steinberg, who served as the state’s insurance consumer advocate under Gov. Roy Barnes.

In a recent interview, Steinberg said the use of insurance scoring does not encourage safer driving and allows companies to charge more to those least able to pay. As consumer advocate, Steinberg pushed for measures to protect Georgians if the practice were allowed.

Some of the factors that count for or against consumers in the computer models may not seem logical.

Even consumers who do manage to pay their bills on time, and do so every month, may not get the best insurance score, according to an AJC review of a handful of insurance scoring models that can be viewed by the public.

For example, some models reward customers with Visas or MasterCard credit cards over those with department store cards. Spreading debt over three cards can result in a better score than consolidating the same amount of debt onto one card.

Too many cards can hurt a score, but so can too few. Various insurance companies will score the same person in a completely different way.

“Some of it is crazy,” said Mark Kincaid, a Texas attorney who served as that state’s consumer insurance advocate under the late Gov. Ann Richards. “Say I go into Sears and they offer me 10 percent off if I get a credit card, so I sign up for one. That hurts my credit rating,” Kincaid said. “You didn’t become a worse driver the minute you said, ‘I want 10 percent off.’ ”

And even if there were a logical connection between credit and claims filed, opponents say, that doesn’t mean that the practice should be used.

“We know there is a correlation between race and life expectancy,” said Birny Birnbaum, a nationally recognized expert on insurance. “We don’t say you have to use race when you price life insurance. We say you can’t use it because it is unfair.”

Birnbaum, one of the country’s most outspoken critics of insurance scoring, believes the practice unfairly penalizes poor people and those whose credit scores plummet through no fault of their own: They get sick, they lose their jobs, their houses get wiped out by a hurricane.

Agents among the critics

The insurance industry has been unable to escape allegations that the use of credit information is unfairly discriminatory.

Even many insurance agents strongly oppose it on those grounds.

The National Association of Professional Allstate Agents has called the practice “inherently discriminatory” and “an unacceptable intrusion upon the privacy rights of the American people.” The National Association of State Farm Agents has called it “a marketing scheme” that could “inadvertently or intentionally illegally discriminate.”

In Florida, the insurance commissioner has ruled that the industry can use credit information in pricing policies only if a company can prove it doesn’t discriminate against certain groups. The industry is challenging that rule in a state administrative proceeding.

Last spring, Allstate agreed to settle a class-action lawsuit alleging that the company’s use of credit information discriminated against its Hispanic and African-American customers.

The lead plaintiff, Jose DeHoyos, 70, of San Antonio, had been with Allstate two decades when his auto and homeowners premiums suddenly jumped because of his credit, according to the lawsuit.

As part of the settlement, scheduled to be finalized Dec. 18 in federal court in San Antonio, Allstate has developed a new scoring model that plaintiffs say is more favorable to minorities. The company has denied any wrongdoing.

In 2003, the year Golick got his legislation passed, Congress ordered the Federal Trade Commission to undertake its comprehensive study. The agency is being asked to determine the impact of insurance scoring on the cost and availability of insurance — and whether some racial or ethnic groups are hit harder than others.

The agency also is expected to determine if the use of credit history is a proxy for race. “We are studying whether scores predict risk, in full or in part, because of their correlation with race,” said Jesse Leary, an economist overseeing the study.

Other studies suggest that African-Americans and Hispanics tend to have worse credit scores than whites.

Insurers cannot use factors such as race or ethnicity when deciding how much to charge customers. Insurers say they do not collect that information.

“It is not unfairly discriminatory,” Golick said. “That being said, I will be the first one to stand up and look at changes if they are warranted.”

A profitable tool

Allstate is among the most sophisticated insurers in the nation when it comes to tapping into credit information. But the company wasn’t the first to use it.

The Progressive Group of Insurance Companies led the country in pioneering a pilot program in the early to mid-1990s that used credit history to predict how risky a customer would be.

Progressive, which traditionally served high-risk drivers, got the attention of the rest of the industry when its use of credit data, combined with traditional factors such as driving record and ZIP code, allowed the company to undercut its competitors on price and steal the best customers.

Last year, Progressive overtook Allstate as the second-largest auto insurer in Georgia, behind State Farm.

While Progressive maintains that aggressive marketing has helped grow its business, it gives a strong nod to insurance scoring. “Credit helped us penetrate the preferred market and more accurately price the high-risk drivers,” said Jerry Rett, product manager for Progressive in Georgia.

Before the advent of insurance scoring, most insurers offered just a handful of prices. Either customers qualified for coverage or they didn’t. And if they didn’t, they could end up with carriers catering to risky drivers.

Today, by using credit history and a few other characteristics — excluding driving record — Progressive has 130 pricing categories.

Insurers say that use of credit information has allowed them to offer insurance to virtually every driver. “Because we are able to properly rate for risk, … just about everybody qualifies for coverage with Allstate,” said Tom Falkenbach, Allstate’s field product manager for the Southeast United States.

Today, Allstate has 384 customer “tiers” based on a customer’s credit history, home ownership status and characteristics from their most recent policy. The company applies those factors on top of a price determined by driving record, age, type of car and ZIP code.

Insurers call this segmenting the market. And they say it’s all about fairness for customers and competitive advantage for insurers.

Sitting behind his desk at the state Capitol, Golick used a pen and paper to sketch out the pricing revolution: The past is one big box with one price; today’s system is a series of many little boxes with many different prices, some much lower than the single price of the past.

“That ability to go in and offer the product at a lower price, what is that? That is market share,” Golick said. “It just breeds competition.”

To offer some customers that lower price, other customers have to pay more — a lot more.

An AJC review of insurance company filings found that large price differences for the same coverage are now commonplace.

Consider the case of a hypothetical 40-year-old married Atlanta man with a clean driving record, a 2000 Ford Taurus and a 12-mile drive to work. The driver is one of several profiles the Georgia Department of Insurance asks companies to price when reviewing rates.

Allstate would charge this Atlanta driver $346 for a six-month policy if he fell into its best insurance score category, according to company figures. If the same driver fell into Allstate’s worst category, he would pay 80 percent more: $631.

State Farm combines credit history and at-fault accidents when scoring its customers. The company refused to reveal the impact of credit history alone, but acknowledged the factor is significant in pricing. A customer with the company’s worst combined score would pay nearly triple the price State Farm offers a customer with the best score.

At some companies, a customer’s credit history now counts almost as much as — if not more than — how many speeding tickets or accidents the person has had. And the insurers say there is a good reason why it’s such a big factor.

“Of the variables like driving record, age, sex, credit is as strong a predictor as any, if not the strongest,” Allstate’s Falkenbach said. “Honestly, I can’t think of anything that is as strong on a stand-alone basis.”

Before the Georgia General Assembly passed Golick’s insurance scoring bill in 2003, the state insurance department worked to restrict companies from using credit information when setting premiums.

Regulator softens blow

Insurance Commissioner Oxendine couldn’t legally uphold an outright ban, but he said he used his regulatory discretion to curtail the practice. The Republican, who won his fourth term as commissioner last month, said his chief concern remains the problem of “garbage in, garbage out.”

The “in” part refers to errors that crop up on consumers’ credit reports. Some studies suggest that as many as eight in 10 reports contain mistakes.

When errors get fed into scoring models, Oxendine said, consumers can end up paying higher insurance premiums than they should.

Ted Jordan says that is what happened to him.

In 2002, Jordan, a manager at BellSouth, began hearing from a creditor that said he owed an $18,500 student loan used to attend the Ding King Training Institute in California, a trade school offering classes in car repair.

But Jordan, 34, who holds degrees from Georgia Tech and Georgia State, says he never attended the Ding King or borrowed money to attend college. He says he is a victim of identity theft, and has sued the lender that made the loan and the credit bureau that reported him as having defaulted on it.

It was Jordan’s attorney who suggested that he check with Allstate to see if the black mark on his credit had prompted a change in his insurance premiums. It turns out that it had spiked his homeowners insurance.

“I didn’t even realize this was happening until I asked a question,” said Jordan, who describes himself as a loyal Allstate customer. “I can understand them using everything they can to mitigate claims. In my case, we had a history.”

Allstate eventually gave Jordan its best rate, he said. But it is just this sort of situation that gave Oxendine pause when insurers began asking for his approval to use credit information.

Oxendine said insurance companies assume that consumers with bad credit are deadbeats. But very few fit that description, he said. “I think most people who have a bad score probably do not deserve it,” he said.

In 2003, Oxendine praised the law that the Legislature passed permitting insurance scoring. In a recent interview, he said that he believed that passage of the bill was a foregone conclusion. Instead of trying to kill it, he said, he focused on adding a host of consumer protections.

Through its interpretation of the law, Oxendine’s office has adopted guidelines that offer Georgia consumers more protections than residents of many other states.

What would Oxendine have done if the Legislature had left the issue up to him?

“I would have told the companies the day you can explain to me how it works and why it works, then I’ll let you do it,” he said. “That day has not yet come and will probably never come.”

A blue-collar burden

With Golick’s legislation now law, the insurance industry is moving on. But another battle looms.

Earlier this year, Allstate asked Oxendine for approval of a system of markdowns called “The Good Hands People Discount.”

Under the plan, some workers — judges, architects and pilots, for example — would get a special discount. But others — including grocery store clerks, hairdressers and chiropractors — would pay the full freight.

Allstate, which offers the occupation-based discounts in other states, says its massive claims database shows that people in some lines of work have more accidents, on average, than those in others.

Oxendine has routinely objected to proposals that factor occupation into pricing, saying it recalls a period when some insurers charged higher premiums to people working as hotel porters, waitresses and shoe-shiners — jobs then typically held by African-Americans.

“Whenever you hear about occupation being used, a red flag tends to pop up,” Oxendine said.

Allstate withdrew the proposal after Oxendine’s office raised questions. But another insurer, Geico, uses occupation and another controversial factor, education level.

Geico has not sought Oxendine’s approval, but has used the factors in underwriting — the initial evaluation of a customer that is not routinely reviewed by regulators in Georgia or most other states.

The use of those factors can be costly to consumers. A study this year by the Consumer Federation of America found that an Atlanta janitor with a high school diploma would pay 60 percent more for the same Geico coverage on a 2006 Ford Taurus than would a company president with a law degree.

Geico strongly defends the practice. “Use of education and occupation is not a new concept in insurance pricing,” a Geico representative said in an e-mail. “Insurers, including Geico, use these factors with the approval of state regulators and have done so for many years, because these factors — along with the more than 18 others Geico uses — are accurate predictors of loss.”

Oxendine said he is investigating Geico to determine how the company is factoring in occupation and education level. “I have concerns, and it bothers me,” he said.

Although Golick’s employer, Allstate, condones using occupation in insurance pricing, he said he is “not terribly comfortable” with it as a lawmaker.

“I will tell you why I am bothered by that,” Golick said in an interview. “I think you are making class distinctions. And there is a very fine line between class distinctions and income distinctions. That is the way it kind of hits me.”

In the future, Golick said, insurers will have access to even more databases filled with personal information. Difficult decisions will have to be made about what is fair game.

“We are talking about, in a larger context, becoming more and more sophisticated at predicting loss,” Golick said. “Just because you can do it, should you do it? And where should you draw the line?”