<< Back to the 2009 Review & Outlook Issue

Review and Outlook 2009-2010: Insurance Societies and Associations

State legislatures considered more than 40 bills that would ban or limit the use of credit-based insurance scoring. Why are we seeing restrictions on underwriting or pricing reemerge in so many states?
Robert Rusbuldt: The credit-based insurance scoring debate is not new; we have seen it and addressed it in the past.
As insurers increasingly rely on consumer credit histories and credit-related scores during the underwriting and rating process, the Big I has urged companies to proactively adopt and implement fair-minded and appropriate business practices regarding their use of credit information. We recognize that consumer credit information is a powerfully predictive tool for insurance companies, but independent agents and brokers firmly believe that such information must be used in sensible, balanced and consumer-friendly ways.
But while we support the use of underwriting and rating tools that foster enhanced competition and the fair and accurate pricing of risk, the policies and underwriting practices of some companies using credit information have been a problem for some consumers and agencies, resulting in legitimate concern and skepticism among policyholders, policymakers and independent agents and brokers.
We will continue to work with our state associations and company partners in the industry to ensure that credit-related information is used responsibly, particularly in this time of economic difficulty.
Charles Chamness: There are two main reasons. First, as the result of the larger political movement to establish term limits in state legislatures during the early part of this decade, we are now seeing increased turnover in legislatures. And we now know the issue of credit-based insurance scoring is not one that intuitively makes sense to the policymaker. It has to be explained. The efficacy of credit-based insurance scoring needs to be shown through studies, and all credible analytical studies show that insurance scoring is an effective underwriting and rating tool.
So there is a learning curve involved. When we deal with new legislators and new leadership of legislative committees, we have to help them understand how valuable it is to consumers and the industry as a risk-evaluation tool.
In addition, the hook that has been used by many who want to reignite this debate is the recession. Their concern is that the economy, which will cause declining credit scores and drive insurance underwriting and pricing. Again, we have presented evidence and heard from the experts–usually at the credit bureaus themselves–who say that this is not the case and that there should be no correlation drawn between broad economic trends and the effect on credit-based insurance scoring in the insurance market.
Dick Bouhan: Over the past 18 months to two years, there has been a dramatic shift toward a negative social mood in this country. It is the social mood, in my view, that drives politics and economics–not the reverse. The outlook of individuals has darkened. Pessimism permeates the nation's psyche. Class distinctions are now more and more the basis of political turmoil and the cause of social unrest.
As a highly regulated business whose underwriting tools–by their very nature–employ “discrimination,” the insurance industry and its underwriting practices are vulnerable to this new negative social mood, as reflected in the darkening attitudes of the state legislators, their constituents and regulatory bodies.
Many of the insurance industry's underwriting practices are now seen as unfair, unjust or just wrong when viewed through the prism of a darkened social mood. So it is not surprising that these practices are coming under scrutiny and criticism in federal and state legislatures.
This negative social mood still has a long run ahead of it, I believe. Consequently, the reemergence of legislative/regulatory proposals that would impose restrictions on underwriting tools will continue for some time.
Leonard C. Brevik: For two reasons: the recession and the fact that periodically new legislators are
elected at the state level who are unfamiliar with the issue.
According to many studies, the use of insurance scores allows insurance companies to give better rates to customers who are less likely to have losses.
But there are also studies that contend that the use of credit-based insurance scoring has a disparate impact on classes of individuals protected under the law–along with other studies that refute these studies, and say there is no such impact.
Many of the proposals we see in state legislatures that would ban or limit the use of insurance scoring are, no doubt, motivated not so much by objective facts than by a strongly-held belief that the practice is unfair. As the industry works with legislators to make its case in support of insurance scoring, opposition usually decreases. But then as new legislators are elected and recessions occur, we have to make our case again and again.