Credit-Score Provider: No Disparate Impact
New Orleans
A provider of credit scoring services told a group of mutual insurers that the evidence present in the marketplace reveals that use of credit records to evaluate insurance customers has no disparate impact on minorities.
Jeffery Skelton, assistant vice president at ChoicePoint Inc., also predicted insurers will continue to adopt this tool to become more competitive.
Speaking during the annual meeting of the Indianapolis-based National Association of Mutual Insurance Companies, he also said he welcomed a recent decision by the National Association of Insurance Commissioners to leave studies on the disparate impact of credit scoring to individual states. The NAIC Credit Scoring Working Groups move to instead focus on unifying states research and applying credit scoring statutes was the "right thing to do at this point," said, Mr. Skelton, whose firm is based in Alpharetta, Ga.
"The useful role for the NAIC now is to look at public policy issues that have been identified at NCOIL [the National Conference of Insurance Legislators], and [to] meet challenges that new laws in various states are going to create for all of us," said Mr. Skelton, during his NAMIC presentation titled "Controlling Your Company's Losses."
"The appropriate role for the NAIC is to look at the proper oversight of state laws that have passed. For example, most laws now say credit-based scoring cant be the sole criteria in the insurance-risk assessment. But how do regulators know for sure that in fact that is not the only criteria insurers are using? This would be one of the issues we have to tackle."
ChoicePoint, which offers credit-scoring models and services to insurers, acknowledges it has been receiving complaints from various consumer groups, he said. "There have been legitimate concerns on consumers part, as they try to understand this tool and how it works," Mr. Skelton observed. "Early on, there werent a lot of good explanations. So its understandable why there would be concerns and frustrations."
But he argued that some opponents of the use of credit scoring have been sensationalizing this topic, by putting the spotlight on extreme cases and a few aggrieved consumers. "In fact, most policyholders benefit from the use of this tool because most consumers have good credit," he pointed out. "Most consumers pay their bills on time and use their credit cards responsibly. The danger is that just looking at extreme cases creates public policies based on exceptions rather than the rule."
Mr. Skelton also said that, short of conducting comprehensive disparate impact studies, one way regulators could get a sense of whether the use of credit scores has an unfair influence on minorities is to examine the change in marketplace.
"One indicator would be that if the use of credit scoring was a tool that had a disparate impact on certain classes, regulators would see a couple of things happen," he said. "First, the number of uninsured motorists and uninsured people in inner cities would go up, because of the concentration of minority groups in inner cities."
He argued that if the use of credit scoring impacts such groups disproportionately, there would be more inner-city residences without insurance because they wouldnt be able to afford it–"their rates would be so high, they would just opt out of the system," he said.
Additionally, a disparate impact would create a hike in high-risk pools in a number of cities including Baltimore and Chicago. "But thats not happening either. So the common sense says if this tool is so detrimental, why arent we seeing this play out in the marketplace, with more people losing their insurance and high-risk pools exploding?" Mr. Skelton said.
He also said another common concern his firm has been hearing is that the insurers use of credit scoring unfairly hurts new immigrants who have little credit history. "But the NCOIL model addresses that head on," he observed, referring to a model law that has been approved in a number of states.
"If you dont have enough on your credit report to be scored, or if you have no report at all, then carriers, in some states, are prohibited from using credit scores. In other states, insurers are allowed to use them, but laws will prescribe how credit scores are used."
He also acknowledged that the NCOIL model is not "the way the industry wanted it to turn out, of course." But "our hope is that its a compromise that regulators and legislators, as well as the industry, can live with. Consumers deserve the protection that the NCOIL model offers."
At any rate, the use of credit scoring is poised to become an integral insurance-risk assessment tool in more and more places, Mr. Skelton predicted. "Initially, there was some hesitancy on the part of some carriers, because there werent laws in place in all the statesBut now that we have a clear guidance in almost all the states, [these] insurers know what the ground rules are, and they can get in the game."
"Quite frankly, with so many other carriers already in the game, if these insurers dont get in, its going to be much harder for them to compete," he said.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 26, 2003. Copyright 2003 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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