A Credit Scoring Conflict Assessment

By E.E. Mazier

NU Online News Service, May 30, 11:30 a.m.EST?Insurers efforts to combat state laws restricting theindustry's use of credit scoring have been more successful thisyear than expected, according to a trade group.

The Alliance of American Insurers said, now that most statelegislatures have recessed, it is finding that activity in thevarious statehouses proved to be less devastating in terms ofanti-credit scoring legislation than originally anticipated by theindustry.

Despite all the rhetoric and the large number of billsintroduced in many states to limit or eliminate insurer use ofcredit information for underwriting and rating purposes, "in theend only a handful of bills and a few regulations were passed,"noted Lynn Knauf, policy manager for the Downers Grove, Ill.-basedAlliance.

"We think next year will be a really tough year and willcontinue to be so for a number of years yet," she added

Ms. Knauf also observed that, with a few exceptions, most ofthose measures enacted represent "reasonable compromises."

To Ms. Knauf this indicates that the insurance industry was ableto convey the message in many of the states that credit scoring"may not be a huge problem as it has been portrayed to be." Infact, some of the bills "may be a problem in search of a solution,"she said.

Ms. Knauf named Maryland as the most problematic state forcredit scoring. This is because the Maryland bill, known as HB 521and recently signed into law, "is essentially a complete ban" oninsurer use of credit information in homeowners insurance and isalso "very restrictive" with regard to automobile insurance, sheexplained.

Additionally, HB 521 as drafted contains many ambiguities, Ms.Knauf said. She also reported that despite the law's Oct. 1effective date, the Maryland Insurance Administration does not yethave answers to many of the questions from the industry on how thenew law will be implemented and what will be required ofinsurers.

Another problematic state is Minnesota. The newly enacted creditscoring law states that insurers cannot use a consumer's credithistory as the sole basis for underwriting decisions, a compromisewidely supported by the industry in Minnesota and other states, Ms.Knauf said.

But the battle lines are being drawn over another provisionrequiring insurers to file credit methodologies and support datawith the Minnesota Department of Commerce, which has jurisdictionover insurance matters.

In fact, the insurance commissioner James C. Bernstein hasannounced he is requiring what he considers convincing proof of whya person's credit history is an accurate predictor of the person'slikelihood of filing a claim.

"Commissioner Bernstein has publicly stated that he is going tomake it virtually impossible for any insurer to comply with the newlaw," Ms. Knauf said. She questioned his legal authority to doso.

Utah also presents problems because the new credit scoring lawtakes effect very shortly and the implementing regulations probablywon't be issued until after the effective date, Ms. Knaufstated.

One issue regularly raised by credit scoring opponents is thesituation of persons who pay for everything in cash and are deniedinsurance due to the lack of a recorded credit history.

Ms. Knauf stated the number of people with no credit history isactually quite small. A common compromise in that situation is notto treat the lack of credit history as a negative underwriting orrating factor, she said, but instead to not use credit as a factorat all.

She also observed that this group includes not just elderlypeople who have paid off their mortgages and now pay for items incash.

"The other end of the spectrum is the people who have defaultedon bills and changed names," Ms. Knauf stated.

She stressed that the purpose of insurer use of credit scores isnot to punish those who have always paid cash. "But you want to becareful when diluting or watering down this tool," she said.