Alliance, Minn. Regulator In Credit Scoring War

By Michael Ha

NU Online News Service, Dec. 12, 3:27 p.m.EST?The Alliance of American Insurers and Minnesota's topinsurance regulator are clashing over the state's new filinginstructions for companies intending to use credit scoring inunderwriting and rating.

The group said the document requirements far exceed the scope ofMinnesota legislation governing the subject and should berescinded. But Minnesota Department of Commerce Commissioner JimBernstein said they represent the minimum requirements to upholdthe law and protect consumers against credit scoring, a businesstool he denounced as a "scam."

In addition to a copy of the newly enacted law governing the useof credit scoring in Minnesota, the Alliance said, the instructionsinclude guidelines for filings and a notice requiring insurers todisclose information regarding their consumer protection practicesin connection with the use of credit information.

"Credit scoring is a valuable business tool, and companies askedus to stridently oppose any regulations or legislation that wouldlimit or prohibit its use.

"We feel that requirements the Commissioner has placed in theindustry are tantamount to prohibiting the use of credit scoring inMinnesota," Bill Schroeder, vice president of the Alliance'sMidwest region, told National Underwriter.

"Requiring insurers to file a laundry list of information underthe guise of consumer protection practices imposes additionalregulatory requirements without following regulatory protocol," Mr.Schroeder said.

"The department is attempting to create regulations without therequired comment and public hearing period," he charged. He saidthe Alliance has been in touch with the department to let it knowits concerns. "No other state has regulations as severe asthese."

But Mr. Bernstein rejected the Alliance's criticism, statingthat what his department has done is simply issue documents thatare entirely based on statutory requirements passed last year.

"In a perfect world, using credit scoring would beprohibited--it's a scam. However, Minnesota law does allow insurersto use credit scoring. The law requires that insurers that areusing or planning to use credit scoring file their methodology--howor when they use it," Mr. Bernstein said.

"Essentially, insurers have to explain their rationale for usingit, and the law left it up to the commerce department to decidewhat's to be included in filings. The information we ask companiesto submit is the minimum amount required in order for us to do ourjob, to ensure that the law is followed here in Minnesota." hesaid.

According to the Downers Grove, Ill.-based Alliance, thecondition that filings include scoring formula and methodologyinformation is excessive--with some requirements vague enough toallow room for filings to be disapproved for non-substantivereasons.

Mr. Schroeder noted that his group is concerned with the"adversarial nature" of the department's correspondence. He saidthe Alliance and several other insurance industry organizations,including the Insurance Federation of Minnesota, are contemplatingwhat actions to take next.

Mr. Bernstein said that the Alliance is defensive about creditscoring because regulators and the public have been looking at thisand are now asking about its validity and fairness.

He said the group "is way off base because the information weare asking insurers to provide is absolutely necessary. There is anoutrage with how the credit scoring is used. Law requires that wheninsurers use or plan to use credit scoring, they must makeexceptions for catastrophic life events such as unemployment anddeath. We need to be able to make sure credit scoring is not usedunfairly when these events occur," he said.

Mr. Bernstein also added that he resents the Alliance claimingto be concerned about a competitive marketplace and consumers.

The Alliance, he said, "represents only insurance companies. Andyet, it is accusing us of taking consumer protection too far. Butthat's because consumers are being hammered by the use of creditscoring.

"If it were really concerned about consumers, it would work withvarious states to prohibit the use of credit scoring. I would alsoadd that insurers asked us to provide instructions on what theyhave to file, so we are simply following their request," he toldNational Underwriter.

He said many regulators are now coming to understand that thereis no clear relationship between credit histories and people'sabilities to operate motor vehicles responsibly or to take care oftheir homes safely and properly.

"Credit scoring was developed by Fair, Isaac and Company, andinsurers bought it. They are forcing it down consumers, and thepublic simply wants to know why. It assumes that people with higherscores are somehow better people," he said.

Mr. Bernstein added that, "The insurance industry says there isa correlation between claims and credit scoring--it's more evidentwith the very best scores and very worst scores. But most peopleare neither. And credit scores fail to take into consideration thatsome of the information in reporting is inaccurate."