The ongoing struggle to preserve maximum underwriting freedomfor insurers continues, with approximately 16 states (to date)considering new legislation to prohibit insures' consideration ofconsumer credit information. Although the volume of legislation isconsistent with the previous 3 years to 4 years, streamlined andunified messaging by the industry is paying early dividends in thelegislative arena.

Read a sounding board column from one of AA&B's editorialadvisory board members: “Creditscoring: Tough to explain, hard to beat.”

Already in 2010, the insurance industry has helped defeatseveral such proposed bans. Chief among them was a significant winin Washington state, where Insurance Commissioner Mike Kreidler hadtelegraphed late last year his intent to press legislation banningthe use of credit information and education and occupation data.PCI, working in concert with industry allies, mobilized immediatelyto educate key legislators about the importance of all three ratingfactors. Ultimately, the legislation failed to receive a committeevote in the state House of Representatives, and did not come up fora vote before a legislative deadline in the state Senate.

These efforts helped ensure that credit ban legislation diedquietly in committee without receiving a hearing in Arizona,Florida, Mississippi, Missouri, Nebraska, New Mexico, SouthCarolina and Virginia. On occasions where ban bills receivedhearings, such as in Maryland, Massachusetts and Washington, PCIpublicly testified in support of the efficacy of this highlypredictive underwriting tool.

Our efforts to protect insurers' ability to consider creditinformation have not been strictly defensive in nature. PCI workedwith leading carriers in Alaska to secure a legislative fix thatwould allow insurers to continue to use credit information in theunderwriting and rating of personal insurance for more than 2 yearsbeyond initial issuance of the policy. And in Kansas, we testifiedin support of legislation that would replace the state's existing“best rate” trigger for sending out adverse action notices with themore standard increase in premium measurement. We are well aware ofthe confusion (most likely soon followed by anger) the “best rate”standard causes policyholders when they receive adverse actionnotices even when they save money because of the use of creditinformation and are working to remedy this in the small minority ofstates that still use “best rate.”

We remain vigilant in defending underwriting freedom year afteryear, not just for the benefit of insurance companies and agentsand brokers, but ultimately for consumers. The more actuariallyjustified information insurers can consider when underwriting andrating insurance, the more consumers benefit with premiums thataccurately reflect the true level of risk they represent, whichmeans less generic (and necessarily lower) prices. That credit isone of the most, if not the most, predictive factor currentlyavailable to insurers has been affirmed by numerous studies:

1. December 2009: A St. AmbroseUniversity survey commissioned by the Iowa Consumer Advocateobserves, “We think the current evidence for the predictive powerof insurance credit scoring is overwhelming.”
2. July 2007: A Federal TradeCommission study concludes, “Credit-based insurance scores areeffective predictors of risk under automobile policies. They arepredictive of the number of claims consumers file and the totalcost of those claims. The use of scores is therefore likely to makethe price of insurance better match the risk of loss posed by theconsumer. Thus, on average, higher-risk consumers will pay higherpremiums, and lower-risk consumers will pay lower premiums.” Thestudy also observed that insurance scoring results in 59 percent ofconsumers enjoying a decrease in their premium.
3. June 2003: EPIC Actuariesconducted a study based on a nationwide sample of 2.7 millionautomobiles and found that insurance scores are unquestionablylinked to consumers' propensity for auto insurance loss.

That consumers benefit from the use of credit information isconfirmed by an annual survey published by the Arkansas InsuranceDepartment. Issued since 2005, the survey consistently finds thatapproximately 40 percent of consumers in the state enjoy a decreasein their insurance premiums due to the use of credit information,while only 10 percent pay more. Premiums for the remaining 50percent of the population is otherwise unaffected. And in a 2005study, the Texas Department of Insurance commented, “By usingcredit scores, insurers can better classify and rate risks based onthe difference in claim experience.”

What happens to prices when insurers are not allowed to usecredit information? After Maryland banned the use of creditinformation for homeowners' insurance in 2002, rates went up at asignificantly faster rate than in the rest of the country and inneighboring states.

The bottom line is that credit-based insurance scoring works,and it saves most consumers money. It is vitally important thateveryone with a stake in the ongoing battle over underwritingfreedom continually and consistently press these points and thesestudies when meeting with policy makers.

Although we have enjoyed a number of successes so far in 2010,we still face challenges. There are ongoing efforts by certainDelaware Senators to ban the use of credit, and in Michigan, thereis an impending decision from the state Supreme Court on thevalidity of credit ban regulations.

We also face an ongoing threat at the federal level, where anumber of legislators continue to take issue with the notion ofusing credit information to set insurance rates. While there is noban legislation currently pending in Congress, we anticipate ahearing in the House on both credit scores and credit-basedinsurance scores sometime before July.

Agents and companies alike should continue to talk tolegislators and remind them that credit-based insurance scoring isaccurate and saves consumers money. It is also objective and blindto consumers' race and income levels because insurers are legallyprohibited from considering these factors when calculatinginsurance scores. Such scoring only measures risk-relevantvariables such as payment history that are indicative of potentialfuture risk.