NAIC Panel OKs Credit Score Best Practices

By Steve Tuckey

NU Online News Service, Sept. 14, 1:35 p.m. EDT, Anchorage, Ala.?Over industry objections, a regulators subgroup meeting here has adopted a set of best practices for insurers' controversial use of credit records to rate personal lines customers.[@@]

The action Sunday by the Credit Scoring Working Group came at the fall session of the National Association of Insurance Commissioners.

Insurer representatives complained that the group's move represented a form of "backdoor" regulation of credit scoring, a practice that has come into increasing use by carriers.

The Credit Scoring Working Group sent the document to its parent Market Regulation Committee, which will most likely approve it at the annual winter meeting in December.

Among the best practices are prohibitions against using credit as a sole factor in determining underwriting and rating policies, and how to treat applicants or policyholders who do not have a history of credit.

For almost two years the Kansas City, Mo.-based NAIC has looked at taking some sort of action on credit scoring but could not reach a consensus. While a number of regulators are dead set against the practice, the industry has grown increasingly dependent on it and numerous analysts feel it will increase as the tool becomes more refined and sophisticated.

Two years ago the National Conference of Insurance Legislators passed a model law that codified acceptance of the practice, but with restrictions such as prohibiting credit scoring as the sole criteria for evaluating a risk and barring insurers from using any adverse credit action stemming from a medical emergency in underwriting and rating policies.

Since that time more than 20 states have adopted the law.

The best practices approach was settled on by regulators who wanted to have a say on a critical regulatory issue, but one on which consensus for an overall law could never be reached.

Lenore Marema, vice president for the Property Casualty Insurers Association of America, Des Plaines, Ill., made the case for the industry, even though its representatives have for the most part accepted the document as a fait accompli.

"Many states have already enacted statutes on the use of credit-based insurance scores," Ms Marema said. "Creating a best practices list at this point begs the question concerning the wisdom and prudence of state legislators when enacting their own laws."

She particularly objected to what she termed an overly broad Federal Trade Commission interpretation of adverse action, which she asserted will create new and costly notice requirements for insurers.

A new business customer "cannot experience an adverse action with initial rating or issuance of the policy because there has not be a change in the rate or terms of coverage," according to Ms. Marema.

Her organization also contends that Scoring Model Submission Standards requiring insurers to file their model or algorithm are not necessary and may impede speed to market, and should only be required where the confidentiality of those models are guaranteed. Confidentiality was not addressed in the "Best Practices" document, Ms. Marema said.

Other issues that are addressed in the document include:

? Neutral, no-hit score?The document devises a formula for those applicants or policyholders who lack credit information.

? Sole Factor?Reiterates insurers must consider factors other than credit scores in underwriting and rating decisions.

? Periodic Review of Credit Scores?Requires insurers to grant consumer request to reunderwrite or re-rate policy once every 12 months.

? Scoring Model Submission Standards?Requires credit score models to be submitted by either insurers or third-party vendors to regulators.

Special Reports /

NAIC Panel OKs Credit Score Best Practices

Related Stories

Recommended For You