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 top insurance regulator are clashing over the state's new filing instructions for companies intending to use credit scoring in underwriting and rating.

The group said the document requirements far exceed the scope of Minnesota legislation governing the subject and should be rescinded. But Minnesota Department of Commerce Commissioner Jim Bernstein said they represent the minimum requirements to uphold the law and protect consumers against credit scoring, a business tool he denounced as a "scam."

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

"Credit scoring is a valuable business tool, and companies asked us to stridently oppose any regulations or legislation that would limit or prohibit its use.

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

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

"The department is attempting to create regulations without the required comment and public hearing period," he charged. He said the Alliance has been in touch with the department to let it know its concerns. "No other state has regulations as severe as these."

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

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

"Essentially, insurers have to explain their rationale for using it, and the law left it up to the commerce department to decide what's to be included in filings. The information we ask companies to submit is the minimum amount required in order for us to do our job, to ensure that the law is followed here in Minnesota." he said.

According to the Downers Grove, Ill.-based Alliance, the condition that filings include scoring formula and methodology information is excessive--with some requirements vague enough to allow room for filings to be disapproved for non-substantive reasons.

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

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

He said the group "is way off base because the information we are asking insurers to provide is absolutely necessary. There is an outrage with how the credit scoring is used. Law requires that when insurers use or plan to use credit scoring, they must make exceptions for catastrophic life events such as unemployment and death. We need to be able to make sure credit scoring is not used unfairly when these events occur," he said.

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

The Alliance, he said, "represents only insurance companies. And yet, it is accusing us of taking consumer protection too far. But that's because consumers are being hammered by the use of credit scoring.

"If it were really concerned about consumers, it would work with various states to prohibit the use of credit scoring. I would also add that insurers asked us to provide instructions on what they have to file, so we are simply following their request," he told National Underwriter.

He said many regulators are now coming to understand that there is no clear relationship between credit histories and people's abilities to operate motor vehicles responsibly or to take care of their homes safely and properly.

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

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

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Alliance, Minn. Regulator In Credit Scoring War

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