NEW YORK--Insurance regulators should put limits around the industry's use of credit scoring but not outlaw it, four commissioners agreed here yesterday, including one who said political forces pushed her to ban the process last year.

"This for me...was the third rail," said Nonnie Burnes, head of the Massachusetts Division of Insurance, speaking at a panel session here.

She noted that a debate over credit scoring that took place during her first year as commissioner "almost cratered" a historic move to transform Massachusetts to a competitive rating state from one in which rates were set by the department.

Ms. Burnes, the only one of the four regulators speaking at the Property-Casualty Joint Industry Forum yesterday who has banned the use of credit information in underwriting and rating, said that while she "had to back down" on a position to allow insurers to use credit information, she has promised to revisit the issue.

"It is clearly correlated to risk, mathematically," she said, explaining her plan to revisit whether to continue the ban after a transition period.

"Does that mean it's good social policy? That's the question," she said.

Ms. Burnes said if it becomes "politically acceptable" to eliminate the Massachusetts credit scoring ban, regulations can be tailored to deal with problems related to inaccurate credit scores and credit problems arising from catastrophic events over which individuals may not have control.

"I don't think I still have the fortitude to take this one on" after last year's move to managed auto competition, she said. "But I do think its worth taking it on," she said, asserting that "responsible people in the inner city...will pay more for auto insurance" if the ban remains in effect.

Bans in some states persist because regulators are "protecting the little man," said James Donelon, commissioner of the Louisiana Insurance Department.

Mr. Donelon, one of two elected commissioners speaking at the Forum, said insurance is a "hot-button political issue." He added, "If you're perceived not to be protecting the little person--the low-income consumer--then you're on the side of the industry."

Mr. Donelon, who described himself as a big supporter of credit scoring, said that education-based rating variables are even tougher to sell to legislators and consumers.

He said this is because there is a perception that while individuals can impact their credit scores, "education may be something God did or did not bless you with."

In South Carolina, where legislators proposed to ban credit scores two years ago, Commissioner Sandy Praeger said the department offered ideas and negotiated with lawmakers on areas where the use of credit information should be limited.

Among the situations where credit should not penalize insureds, she said, are situations where older people have "thin files" because they don't buy on credit.

Other situations include medical debt, a situation where a divorce puts someone in a compromised financial situation, and a situation where someone smartly shops around for home loans at different lending institutions generating a number of hits on the credit record.

"We were branded in the media for a while," she said, noting that various reports said the department was trying to put in place an environment allowing the use of credit scores. "We had to point out that they had been used for a long time [and] that we were trying to get the authority to put some regulation in place."

Noting that complaints about the use of credit scores have since dipped in her state, Ms. Praeger attributes the drop not just to regulations, but to the fact that consumers are more aware of their personal responsibility to protect their credit scores.

Scott Richardson, director of the South Carolina Department of Insurance, described a different kind of limitation on the use of credit scores during the panel discussion, suggesting that consumers "don't have a problem" if the rate for someone with "squeaky clean" credit is $500, while someone with credit problems pays $530.

"When they see examples of $500 versus $800, that's where social engineering comes in," he said, suggesting that restrictions on the extent to which a credit score can be used will be the trend of future legislation.

Special Reports /

Limits, Not Bans, Needed For Use Of Credit Score Variables

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