States Drop Plans For Study Of Credit Scoring
However, regulators and industry agree to collaborate with feds on mandated FTC probe
State regulators, who had been threatened with legal action if they continued their multistate study of insurance carrier use of credit information in underwriting, have agreed to drop the effort.
The announcement by the National Association of Insurance Commissioners said that after discussions with four industry trade groups, they would suspend the study.
The eight states involved Indiana, Louisiana, Maryland, Missouri, Montana, Nevada, Oregon and Washington said they made their decision when the industry agreed to provide data and to support the collaboration between state and federal regulators on a Congressionally-mandated study on the same topic by the Federal Trade Commission.
Under the agreement, the NAIC will appoint a five-member state panel to work with the FTC and the Federal Reserve Board "to analyze industry data and make findings as to the actuarial validity of credit scoring and its impact on various demographic groups," the statement said.
Critics have said the use of credit scoring in underwriting insurance unfairly impacts minorities and fails to account for unique events that can skew ratings. Insurers say the process is objective underwriting that properly spreads the cost of risk.
The PCI had announced previously that it was considering legal action if the states held to a demand that data be supplied by Aug. 20.
"AIA, NAMIC, PCI and MIC support the decision of the commissioners to suspend work on the multistate study, and we pledge to work closely and collaboratively with the FTC study," said Mr. Shapo. He added that he expected the eight states involved in the study to notify insurers that their call for data was being withdrawn.
The regulators statement made no mention of the threat of litigation. "This is a win-win proposition for consumers and the industry," said Scott B. Lakin, director of insurance in Missouri, the lead state in what was to be the multistate study. "Independent researchers will have access to the data needed to answer the important questions that state insurance officials have been asking about the effect of credit scoring on consumers, and the industry can keep its administrative burdens to a minimum."
Noting that federal regulators would retain the data collected and have final responsibility for the findings reported back to Congress, Mr. Lakin said he was confident the collaborative effort would be successful. "If not," he added, "the states have reserved the right to renew our multistate study."
"Im pleased that the NAIC leadership can play a role in bringing the parties together on a contentious issue such as credit scoring," said Joel Ario, insurance administrator in Oregon and secretary-treasurer of the NAIC. "We look forward to implementing this agreement by appointing a fair and balanced panel of state regulators to work with the FTC."
The FTC study is being designed pursuant to Section 215 of the Fair and Accurate Credit Transactions Act, which calls for a final report to Congress by December 2005.
A Missouri insurance department representative, Randy McConnell, had said before the final announcement that halting the state research initiative was under consideration because the threatened litigation could impede the study, and there is an interest in "getting something produced of value to consumers" in a timely fashion.
Robert Zeman, senior vice president for the Des Plaines, Ill.-based PCI, announced last month that as the deadline for the data call neared, the organization would look at options, "including a potential legal action." PCI, as well as NAMIC and AIA, argued that regulators, in commencing the study, were acting outside their legal authority.
Insurers contend that under law they can use credit scoring as a factor to set rates as long as they underwrite objectively, regardless of how the process impacts consumers. According to PCI, only three jurisdictions California, Hawaii and Maryland have some form of credit scoring ban, and efforts to secure a prohibition in other states, including Missouri, have failed.
Insurers support legislation based on a model credit scoring bill drafted by the National Council of Insurance Legislators, which 20 states have adopted in some form. (See NU, July 26, page 25.)
The latest among the states to adopt the NCOIL model was New York. The measure there was approved June 22 and became law without the governor's signature on July 27.
Under the New York version, carriers are prohibited from using income, gender, address, ZIP code, ethnic group, religion, marital status or nationality as a factor in credit scoring. It also forbids denying a policy for personal lines insurance solely based on credit information, would not permit its use to deny a renewal, and its score would have to be recalculated if a consumer requested it.
New York consumers must be notified of adverse action based on a credit score, and the factor could not be used against those with no credit history.
Reproduced from National Underwriter Edition, August 5, 2004. Copyright 2004 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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