Common Sense Answers Sought For CLUE

For nearly three years now, regulators, consumer groups and insurance industry representatives have sparred over the proper use of loss history in homeowners' insurance underwriting.

According to the National Association of Mutual Insurance Companies, 14 states have enacted laws and regulations dealing with the issue, while almost as many have considered such measures in recent times.

So, now that it appears at least some spark has gone out of the debate, how much has the industry lost in its effort to keep loss history as underwriting tool?

While no quantitative assessments have been offered, Eric Goldberg, assistant general counsel for the American Insurance Association, said the numerous state laws and regulations enacted over the past few years have not been beneficial for the cause of good underwriting.

"I think the idea that is most troublesome is that carriers are using this information to penalize customers, which misunderstands the way insurance works," Mr. Goldberg said. "What we have been saying all along is that loss history is indicative of future loss."

According to Lynn Knauf of the Property Casualty Insurers Association of America, while legislative efforts to restrict the use of loss history reports in new business underwriting have eased up this year, "there are still numerous efforts to restrict the use of loss history, in general, in underwriting and rating decisions, not only for new business but also renewals," she said.

Industry critics and some regulators at first expressed concern that the databases insurers use--primarily ChoicePoint's Comprehensive Loss Underwriting Exchange (and ISO's Automobile-Property Loss Underwriting Service, or A-PLUS, for auto)--have unfairly restricted coverage through arbitrary automated decisions.

The industry maintains that such databases allow underwriters to use the calculations they always have, but in a more cost-efficient and timely manner.

Most concerns stemmed from the fact that mere inquiries to agents on the possibility of filing a claim could count as negative marks on customers' loss history reports.

North Dakota has passed what many insurance representatives feel is the most restrictive regulation. But Commissioner Jim Poolman feels the curbs are merely "common sense" measures.

Legislators in North Dakota "overwhelmingly agreed" that it was reasonable for insurers to use actual claims. "But where a consumer receives absolutely no payment from an insurer, or where a simple inquiry into coverage [is used] as a strike against the consumer in underwriting practice,"' he said, North Dakota legislators viewed the practices as unacceptable.

One person's common sense, however, may not be that of the next.

Ms. Knauf said that two problems exist with prohibitions against using so-called closed-without-payments cases in loss history.

First, the loss itself, regardless of payment, could be predictive of future loss, she said.

"And sometimes, where fraud is suspected, the claimant will withdraw the claim when the claims adjuster suspects something, or requests an examination under oath," she said.

Restrictions on use of claims history come in a number of forms, including time limits. Ms. Knauf finds them among the most troubling, noting that most states allow a company 60 days to underwrite a risk and take the appropriate action according to its underwriting guidelines.

"Obviously, no company strives to take as long as possible to underwrite a risk, but sometimes a full 60 days is needed--and sometimes the time is an additional advantage for the consumer," she said.

Birny Birnbaum, director for the Center of Economic Justice and funded consumer representative at the National Association of Insurance Commissioners, said the North Dakota law should serve as the template nationwide.

Provisions of the bill such as prohibitions against use of 10-year-old claims unless there is proof of property-owner negligence, and also mere inquiries, would strike most consumers as sensible, he said.

"The most remarkable aspect of the S.B. 2816 [North Dakota's law] is the knowledge that insurers were actually engaged in such prohibited practices," he said.

Mr. Birnbaum sees a great opportunity for the NAIC to pick up the ball it dropped in the credit scoring debate and develop a model law to correct what he terms industry abuses.

While that group is currently mulling taking some action, it appears the steam has gone out of any such effort.

Meanwhile, lawmakers can look to the National Conference of Insurance Legislators model approved last summer, despite the grumbling of some state lawmakers that it represented a mere consensus among various factions of the insurance industry.

Complaints about the use of claims history and databases started with the real estate industry and the purported delays in closings that were caused by difficulty in obtaining homeowners' insurance.

In February of 2002, Cathy Whatley, then president of the National Association of Realtors, listed credit scoring and use of the CLUE databases as threats to the dream of homeownership.

Ms. Knauf said she hoped some of those concerns had been alleviated. "It is interesting to note that at the same time that the NAR was most vocal about the issue, sales of used homes were at a record high," she said. Moreover, potential home buyers think of property loss history reports as "pro-consumer" tools, she said.

The more political commissioners have seen the loss history use debate as fairly potent. California's John Garamendi, who is running for lieutenant governor next year and has run for governor in the past, has been among the most vocal opponents of what he terms the insurance industry's "use-it-and-lose-it" policy.

"There is not a homeowner in California who doesn't hesitate before filing a legitimate insurance claim," he said earlier this year. "They have a very real and justified fear that they may lose their insurance or be forced to pay significantly more in premiums."

Mr. Garamendi, however, lost a round in court in a suit brought by the insurance industry in the state and was forced to rescind some of his restrictions on the use of loss history.

For industry critics like Mr. Birnbaum and Mr. Garamendi automated loss history reports and credit scores are just two elements of a new underwriting that goes beyond industry arguments of merely making a better match of rate to risk.

"What is needed is a different approach to regulating what types of information can be used for underwriting, rating and claims settlement," Mr. Birnbaum said.

Such an approach would entail a regulator approving any new type of information before an insurer can use it, rather than waiting for what Mr. Birnbaum termed an abusive practice to surface from the use of such data.

"The revolution in the amount of information about consumers and the ability to use that information could benefit consumers mightily by leading to major advances in loss prevention," he said. "But this revolution will only benefit consumers if there are substantive public policy discussions and decisions before insurers can use that information."

Art caption (two people yelling at one another):

While cooler heads may prevail as the debate of the use of loss history databases continues, key issues--like the use of closed-no-pay claims--need to be ironed out.

Infographic with mugs:

Flag: Point/ Counterpoint

North Dakota's law is common sense. "Where a consumer receives absolutely no payment from an insurer, or where a simple inquiry into coverage [is used] as a strike against the consumer in underwriting practice," the practices are unacceptable.

North Dakota Commissioner Jim Poolman

"Where fraud is suspected, the claimant will withdraw the claim when the claims adjuster suspects something, or requests an examination under oath."

Lynn Knauf, PCIAA

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Common Sense Answers Sought For CLUE

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