Insurers Face Uphill Credit Score Battle

The Working Group is co-chaired by Joel S. Ario, insurance administrator for the Oregon Insurance Division. His co-chair is Mike Kreidler, commissioner of insurance for the state of Washington, which recently became the first state in 2002 to pass a bill restricting the use of credit scores by insurers. (The bill had not been signed into law as this edition went to press. Meanwhile, measures restricting insurer use of credit-based insurance scores were signed into law last week in Idaho and Utah.)

Mr. Ario said the Working Group has been asked to look into whether the NAIC should adopt a model act or regulation addressing insurer use of credit scores. After hearing presentations from Connecticut, Florida, Maryland, Oregon and Washington 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 NAICs national meeting in September, and to have the NAIC Executive Committee and Plenary adopt the final work product at the following national meeting in December.

This timetable was greeted with skepticism by some of the regulators and industry representatives present, particularly because the Working Group seems headed toward ordering an actuarial study to determine whether there is an actual connection between a persons credit history and the likelihood of filing an insurance 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 and not also on 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.

Next, Minnesota Commissioner Jim Bernstein, an outspoken opponent of insurer use of credit scores, gave several anecdotal examples of consumers in his state "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 in Austin, Texas, listed a number of sub-issues that he said need to be addressed by regulators. These include insurers conditioning a particular premium payment plan on a consumers credit score, public disclosure of credit scores, the need to update credit-scoring models and a consideration of the actuarial standards for risk classification.

David Snyder, assistant general counsel for the American Insurance Association in Washington, D.C., told the 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.

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

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

He also took issue with the suggestion that insurer use of credit scores might have a "disparate impact" on certain minority groups. Mr. Snyder indicated that the AIA had asked a civil rights attorney about this. The attorney noted that 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 about the groups agenda and priorities.

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

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, April 1, 2002. Copyright 2002 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.