NAIC Meeting Highlights Credit Scoring Debate

"I think the study should be done, but we want to first develop perimeters of the study–identify the questions we want answers to," Mike Kreidler, co-chair of the market regulation and consumer affairs committee for the credit scoring working group, told National Underwriter.

His comments came during his committee meeting on Sunday, March 9, at the NAIC's spring meeting in Atlanta.

Mr. Kreidler explained that his committee is charged with developing guidance regarding minimum data elements should the NAIC decide to lend its backing to a study. And it is the judgment of the committee, he added, that if such a study is undertaken, it should determine whether rating plans using credit history systematically produce different results for blacks, Hispanics and white non-Hispanics, and whether there are variations of results by age and income.

"One of the challenges is that it will take considerable resources to undertake a study of this magnitude," said Mr. Kreidler, who is also insurance commissioner of Washington, which became the first state to pass a bill limiting insurers' use of credit scores last year.

Separately, one of the new findings brought to the regulators' attention at the committee meeting was a study by the University of Texas, whose results indicate a strong correlation between credit scores and the risk of loss, according to the American Insurance Association.

"On March 6, the University of Texas released a study called ?A Statistical Analysis of the Relationship Between Credit History and Insurance Losses.' The study is by far the largest, most comprehensive state insurance study that has been completed over the past year," said David Snyder, assistant general counsel for the Washington, D.C.-based AIA.

The study matched policyholder loss records for more than 153,000 auto insurance policies with credit scores for the named insured driver, Mr. Snyder said. He said that five leading auto insurers supplied loss data and driver information, while Choicepoint, an Alpharetta, Ga.-based risk management information provider, matched named policyholders with a credit score.

In general, lower credit scores were associated with higher loss experience, indicating that credit scores are a useful tool in helping to predict future loss experience, he said.

The study also found that credit scoring fine-tunes the accuracy of auto insurance underwriting and ratings in regard to predicting future loss experience of individual policyholders, when compared to the use of traditional variables alone, Mr. Snyder added.

The report doesn't examine, however, the potential impact that the credit scoring may have in premiums for specific groups of people based on race or income.

But even if the insurer use of credit information in the underwriting or rating process, sometimes known as "insurance scoring," inadvertently affects one ethnic or income group more than another, "that would be irrelevant. It would not violate legal standards," said Mr. Snyder.

"The legal test is whether intentional discrimination is occurring, and there is no evidence that insurers have any idea about the race and income of their policyholders," he said.

He also observed that in Maryland, where there is now a near-ban on the use of credit information in underwriting and rating personal insurance, some insurers have responded by raising rates across the board or eliminating the lowest-price tier.

The most significant finding about credit scoring legislation is that it impacts the market in a very negative way, Mr. Snyder told National Underwriter. "These negative effects artificially create a hard market, and it is the consumers who ultimately pay the price with a fewer choice of companies and unjustified, higher rates for good risks."

But consumer advocate Birny Birnbaum, consulting economist for the Center for Economic Justice in Austin, Texas, told regulators that the credit scoring is unlike any other factor.

Mr. Birnbaum noted that according to the insurance industry, the only issue worth examining is whether there is a correlation between insurance scoring and the risk of loss and whether the use of credit scoring complies with current rating laws.

But what's missing in all this, he contends, is a public-policy debate.

"I have personally testified before state legislatures and insurance commissioners in many states, and the issue of whether credit scoring has a disproportionate impact on poor consumers, on seniors, on immigrants, and on other classes or consumers has arisen in each state," he said.

"In a report prepared for the Ohio Civil Rights Commission in January, I concluded that insurance credit scoring very likely has a disproportionate impact by race and income," Mr. Birnbaum said.