NAIC Session Hits Credit Scoring

David Snyder, assistant general counsel for the American Insurance Association, headquartered in Washington, D.C., told the Credit Scoring Working Group that, based on what he had heard at the meeting, a proper balance between protecting consumers and ensuring an open, competitive insurance market appeared to be lacking.

Most of the regulators who spoke at the meeting referred to at least one of two main concerns.

The first was possible deleterious effects on consumers from insurer use of credit information in the underwriting or rating process sometimes known as "insurance scoring."

The second was a question as to the amount of convincing evidence there is concerning whether and why credit scores are genuine predictors of future risk exposure.

The working group is headed by two co-chairmen–Joel S. Ario, Insurance Administrator for the Oregon Insurance Division, and Mike Kreidler, Washington insurance commissioner. Washington became the first state in 2002 to pass a bill restricting insurers use of credit scores. The bill has been sent to the governor.

Mr. Ario said the aim of the working group is to consider whether the NAIC should adopt a model act or regulation addressing insurer use of credit scores.

After hearing presentations from Washington, Connecticut, Oregon, Florida and Maryland on what those states are doing on this issue, the working group unveiled an ambitious timetable for completing its charge.

The ultimate goal is for the group to adopt a "final work product" by the NAIC's national meeting in September and to have the NAIC Executive Committee and Plenary adopt the final work product at the national meeting in December.

This timetable was greeted with skepticism by some of the regulators and industry representatives, particularly because the working group may order an actuarial study.

The study's purpose would be to determine whether there is an actual connection between a person's credit history and likelihood of filing a claim.

While at least two such studies (in 1997 by Tillinghast and in 1999 by the Virginia Bureau of Insurance) were conducted in the past, several working group members dismissed those as inadequate or flawed because, for example, they focused on underwriting but not rating.

Recognizing that a more comprehensive study will be difficult to formulate, Mr. Ario asked all interested parties to submit suggestions on actuarial methodologies that might be employed.

Minnesota Commissioner Jim Bernstein, an outspoken opponent of insurer use of credit scores, gave several anecdotal examples of consumers in his state who were "hurt" by insurer use of credit scores.

In response, Mr. Ario said he hoped the working group could "take the emotion" out of the debate.

He also pointed out that the group is supposed to represent "the full spectrum" of interested parties.

Consumer advocate Birny Birnbaum, consulting economist for the Center for Economic Justice, Austin, Texas, listed a number of sub-issues that in his view need addressing by regulators.

These include insurers' conditioning a particular premium payment plan on a consumer's credit score, public disclosure of credit scores, the need to update credit-scoring models, and a consideration of the actuarial standards for risk classification.

Repeating what has essentially become an industry mantra, Mr. Snyder, the AIA counsel, said use of credit scores has allowed some insurers to compete in markets they otherwise might not compete in, leading to more choice for consumers.

He also noted that one fact ignored by the working group was the many consumers across the country recognized as better risks because of their credit scores. "Those people need to be balanced in the equation as well," Mr. Snyder said.

He also took issue with the suggestion that insurer use of credit scores may have a "disparate impact" on certain minority groups.

Mr. Snyder indicated that the AIA had asked a civil rights attorney about this. The attorney pointed out that in the civil rights area, the courts have recognized that even if there is a disparate impact on a group of people, as long as a legitimate business reason for a particular action or classification exists, "that ends the issue," Mr. Snyder reported.

Therefore, he asked that any actuarial study take into consideration whether there is a legitimate business purpose for insurer use of credit scores.

After hearing from other industry and consumer representatives, Mr. Ario commented that based on what had been said at the meeting, "consumer scoring is the worst thing since the Bubonic Plague and the best thing since sliced bread."

He emphasized several times that the working group is open to suggestions from all interested parties as to what should be the group's agenda and priorities.

Finally, Mr. Kreidler praised the agent community, particularly independent agents, for bringing the matter of credit scoring to the attention of regulators.