NAMIC Sends Policymakers Credit Scoring Defense

NAMIC said it was being joined in sending the paper to the nation's governors, insurance regulators, state legislators, and national legislative organizations by the American Insurance Association and the Property Casualty Insurers Association of America.

NAMIC's white paper is the insurance industry's latest effort to defend credit scoring while an eight-state study by regulators examines its validity.

The multi-state effort is being led by the Missouri Insurance Department, which earlier this year produced a study that found credit scoring had a disparate impact on residents in low income and minority population areas. The department said it heard residents in these areas were charged higher prices.

The white paper, NAMIC said "offers a critical analysis of current efforts to extend the disparate impact legal theory to the use of credit-based insurance scoring, exposing the theory's inherent flaws
and highlights the special difficulties that arise when the theory is applied to situations other than employment discrimination litigation."

"The use and regulation of credit-based insurance scoring for underwriting and rating purposes is a challenging issue facing public policymakers and insurance companies," said Roger H. Schmelzer, NAMIC senior vice president for state and regulatory affairs.

"One lesson learned from working in the states on almost any insurance issue, but especially in regard to credit-based insurance scoring, is the need for more information on the public policy consequences of new laws that could change the way companies conduct their business, ultimately harming consumers," Mr. Schmelzer said.

"We are very pleased to distribute this paper with our property-casualty advocacy colleagues at the AIA and PCI," said Mr. Schmelzer. "NAMIC respects both organizations and is grateful for their contributions." He said that the joint distribution "serves as a powerful statement that the property-casualty industry is united on this issue."

According to Mr. Schmelzer, some regulators oppose the use of credit-based insurance scoring while legislators continue to introduce bills that would curtail or abolish credit-based insurance scoring.

NAMIC noted that credit scoring opponents often base their efforts on statistics that suggest an adverse impact on racial and ethnic minorities.

The term "disparate impact," NAMIC said, is sometimes used as shorthand for these statistics when discussing
credit-based insurance scoring in this public policy context. However, Mr. Schmelzer said "disparate impact" is a specific legal standard that has not been applied to insurance and in any case, cannot legitimately be invoked if based merely on a statistical conclusion.

NAMIC said its paper explains why caution should be used before considering transfer of the term to insurance,
especially in a non-judicial setting.

The paper states that, while federal courts use a multi-part analysis to determine existence of a disparate
impact, they have done so in structured legal settings: Title VII employment
discrimination cases and under the Federal Housing Act. The analysis has not been applied to insurance, it said.

Where it is applied under federal case law, the paper said, analysis of a disparate impact claim comes with standards of proof and affirmative defenses for adjudicating particular disputes between discrete parties.

If ever used to evaluate an insurance-related complaint, the doctrine, according to NAMIC, would undoubtedly permit individual insurers to defend their use of insurance scoring by showing that it serves a legitimate business purpose.

The paper finds that on relatively few occasions when the disparate impact theory has been applied to
areas similar to insurance, such as mortgage lending and the granting of credit, courts have found it necessary to modify the theory, making it easier to defend challenged practices.

NAMIC's paper said that in 2003, Congress expressly reauthorized the use of credit information for insurance
purposes. States may not use their authority to circumvent laws passed by Congress, the organization said.

The trade group's paper said state laws permit the classification of risk and the pricing of insurance according to
the risk accepted by the insurer. These practices are heavily regulated by state
departments of insurance to assure solvency in addition to fair and actuarially-sound benefits for insurance consumers, NAMIC said.

The paper lists the "two most compelling reasons for caution."

It argues that the majority of consumers benefit by paying less for insurance because of the positive
impact of their credit-based insurance score.

Insurance scoring, NAMIC said, allows companies to write more business and the ability to more accurately predict the risk of loss allows insurers to insure more consumers. When choices for consumers are increased, a positive influence on price generally ensues.

The paper entitled "The Legal Theory of Disparate Impact Does Not Apply to the Region of Credit-Based
Insurance Scoring"can be downloaded at NAMIC's Web site, NAMIC Online,
at http://www.namic.org/private/logdownloadanddisplaydoc.asp?ID=17

NAMIC counts more than 1,350 member companies that underwrite 41 percent ($170 billion) of the property/casualty insurance premium in the United States.