NAIC Backs Off On Credit Scoring Study
State regulatorsnever comfortable with the use of credit scoring to underwrite insurancewere determined to initiate a multistate study to get to the bottom of the controversy over whether the risk assessment tool did more harm than good, much to the chagrin of carriers.
However, the industry launched a counterattack, threatening to sue if the National Association of Insurance Commissioners insisted on going forward, contending that the regulators were acting beyond their legal authority with the data call prompted by the eight-state probe.
Ultimately, the NAIC backed off in August, agreeing to suspend their investigation as part of a compromise that would allow state regulators to play a part in a Federal Trade Commission study on credit scoring and its impact, mandated by Congress.
Under the deal, the NAIC would appoint a five-member panel to work with the FTC and Federal Reserve to "analyze industry data and make findings as to the actuarial validity of credit scoring and its impact on various demographic groups," the state regulator group said. The FTCs report is due to Congress by next December.
Opponents of credit scoring no doubt hope the report will confirm their worst fearsthat it has an unfair impact on minorities and fails to take into account unique events that might skew an individuals rating. Proponents in the industry believe it will show that credit scores help underwriters more accurately assess exposures and issue more justifiable quotesthat credit scores are fair and reasonable as long as they are applied objectively and with certain limits.
Indeed, a model law approved in 2002 by the National Council of Insurance Legislators (that has since been adopted by at least 20 states) sets restrictions over the use of the underwriting tool, such as prohibiting credit scoring as the sole insurance rate evaluation factor.
However, the controversy reared its head again when the NAICs Credit Scoring Working Group adopted a set of best practices for insurer use of such criteria. Although carriers complained the move was "backdoor" regulation, the full NAIC has adopted the guidelines.
Reproduced from National Underwriter Edition, December 16, 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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