A Credit Scoring Conflict Assessment

A Credit Scoring Conflict Assessment

By E.E. Mazier

NU Online News Service, May 30, 11:30 a.m. EST?Insurers efforts to combat state laws restricting the industry's use of credit scoring have been more successful this year than expected, according to a trade group.

The Alliance of American Insurers said, now that most state legislatures have recessed, it is finding that activity in the various statehouses proved to be less devastating in terms of anti-credit scoring legislation than originally anticipated by the industry.

Despite all the rhetoric and the large number of bills introduced in many states to limit or eliminate insurer use of credit information for underwriting and rating purposes, "in the end only a handful of bills and a few regulations were passed," noted Lynn Knauf, policy manager for the Downers Grove, Ill.-based Alliance.

"We think next year will be a really tough year and will continue to be so for a number of years yet," she added

Ms. Knauf also observed that, with a few exceptions, most of those measures enacted represent "reasonable compromises."

To Ms. Knauf this indicates that the insurance industry was able to convey the message in many of the states that credit scoring "may not be a huge problem as it has been portrayed to be." In fact, some of the bills "may be a problem in search of a solution," she said.

Ms. Knauf named Maryland as the most problematic state for credit scoring. This is because the Maryland bill, known as HB 521 and recently signed into law, "is essentially a complete ban" on insurer use of credit information in homeowners insurance and is also "very restrictive" with regard to automobile insurance, she explained.

Additionally, HB 521 as drafted contains many ambiguities, Ms. Knauf said. She also reported that despite the law's Oct. 1 effective date, the Maryland Insurance Administration does not yet have answers to many of the questions from the industry on how the new law will be implemented and what will be required of insurers.

Another problematic state is Minnesota. The newly enacted credit scoring law states that insurers cannot use a consumer's credit history as the sole basis for underwriting decisions, a compromise widely supported by the industry in Minnesota and other states, Ms. Knauf said.

But the battle lines are being drawn over another provision requiring insurers to file credit methodologies and support data with the Minnesota Department of Commerce, which has jurisdiction over insurance matters.

In fact, the insurance commissioner James C. Bernstein has announced he is requiring what he considers convincing proof of why a person's credit history is an accurate predictor of the person's likelihood of filing a claim.

"Commissioner Bernstein has publicly stated that he is going to make it virtually impossible for any insurer to comply with the new law," Ms. Knauf said. She questioned his legal authority to do so.

Utah also presents problems because the new credit scoring law takes effect very shortly and the implementing regulations probably won't be issued until after the effective date, Ms. Knauf stated.

One issue regularly raised by credit scoring opponents is the situation of persons who pay for everything in cash and are denied insurance due to the lack of a recorded credit history.

Ms. Knauf stated the number of people with no credit history is actually quite small. A common compromise in that situation is not to treat the lack of credit history as a negative underwriting or rating factor, she said, but instead to not use credit as a factor at all.

She also observed that this group includes not just elderly people who have paid off their mortgages and now pay for items in cash.

"The other end of the spectrum is the people who have defaulted on bills and changed names," Ms. Knauf stated.

She stressed that the purpose of insurer use of credit scores is not to punish those who have always paid cash. "But you want to be careful when diluting or watering down this tool," she said.