Insurers Defend Use Of Credit Scoring

As framed by Committee Co-Chair Joel S. Ario, who is insurance administrator for Oregon, the issue was whether and how the use of credit scoring should be regulated beyond what it is currently.

Consumer advocates testifying against the rating tool asked that independent studies be conducted on the impact of insurance scoring on young, low-income, minority and female consumers.

One consumer advocate, David "Birny" Birnbaum, consulting economist for the Center for Economic Justice, based in Austin, Texas, stated that no relation between insurance loss ratios and bankruptcies or mortgage foreclosures has been shown.

Mr. Birnbaum called for greater and clearer disclosures by insurers of the financial information they gather on consumers. He said that, armed with this knowledge, consumers could more easily manipulate their financial data, such as by clearing up inaccuracies in their credit reports. He also declared that the mere existence of a correlation between a rating factor and risk of loss "doesn't mean that insurers should be permitted to use" that factor.

J. Robert Hunter, director of insurance for the Consumer Federation of America in Washington, pointed out the alleged shortcomings of credit scoring. For example, he noted that the presence of financial assets is not included in an individual's credit scores. Nor do the scores take into account "what happens when the country has economic upheaval, or when the laws on bankruptcy change," he said.

He also observed that insurance companies tend to withhold public release of studies that purportedly justify the use of consumer credit information by calling the reports proprietary. Finally, Mr. Hunter indicated that consumers who have paid off their houses and cars or who tend to pay for items in cash are receiving low credit scores.

Michael Kreidler, insurance commissioner for Washington, later echoed this view by testifying that the elderly and Hispanics in his state tend to use credit differently from other populations. As a result, they are often "penalized" in credit scoring, and end up with higher premiums for auto and homeowners insurance, he said.

In contrast, an industry representative told the regulators that "credit information gives insurers a tool to underwrite and fairly price personal lines coverages." Samuel Sorich, vice president and Western regional manager for the National Association of Independent Insurers, based in Des Plaines, Ill., testified that the use of insurance scores has increased the availability of coverage to "millions of drivers and homeowners."

He added that "this tool has helped insurers better achieve the goals of objectivity, completeness of information, equity and efficiency."

Mr. Sorich urged regulators to approach restrictions on the use of insurance scores "with great caution."

He also noted that, in addition to industry statistics, a 1997 White Paper from the NAIC itself on credit information found no studies in the insurance field demonstrating that the use of credit information had a disproportionate impact on specific consumer groups. Further, a 1999 study by the Virginia Bureau of Insurance on insurance scoring found no support for charges of unfair discrimination, Mr. Sorich stated.

Another industry representative, David F. Snyder, assistant general counsel for the Washington-based American Insurance Association, testified that the use of credit-based insurance scores minimizes subjectivity, which in turn leads to impartial underwriting and pricing decisions.

But the opinion of regulatory witness Merwin Stewart, the Utah insurance commissioner, on credit scoring, was that "if we can't regulate it, eliminate it."

A recurring question throughout the hearing was why there is a relationship between credit history and loss ratios.

Mr. Snyder cited a 2000 study prepared by actuary James E. Monaghan for the Casualty Actuarial Society on the question: "Why would an individual who has current or past difficulties meeting financial obligations be expected to have above-average costs to an auto insurer?"

According to Mr. Snyder, some of the possibilities cited by Mr. Monaghan included maintenance, moral hazard, claim consciousness, increased frequency and severity of fraud, and stress.

But although insurance scores are "irrefutably predictive," insurers still have a responsibility to use the tool fairly and wisely, Mr. Snyder said. He reassured regulators that insurers will still consider the extraordinary circumstances of individual consumers–such as medical issues, terrorist attacks and identity theft–when evaluating a risk.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, December 24, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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