Regulators Poised To Probe Credit Scoring

San Francisco

Regulators are poised to begin exploring how to gather data on insurer use of credit information to determine premiums, and might even expand their study to examine other rating factors in underwriting.

That's the word that came down from the chair of the National Association of Insurance Commissioners Property and Casualty Committee at the group's meeting here this month.

The committee would like to collect information and develop a report on the controversial credit scoring issue by the third quarter of 2010, according to Illinois Insurance Director and Committee Chair Michael McRaith.

During a committee meeting at the NAIC Winter National Meeting here, Mr. McRaith said he plans to schedule a public conference call in January, during which regulators will discuss how to approach developing a set of questions designed to procure information from individual insurers on how they use consumer credit information.

Connecticut Insurance Commissioner Thomas Sullivan, recalling a question he asked in March when the P&C Committee and Market Regulation and Consumer Affairs Committee first sought permission to hold a joint hearing on credit-based insurance scores, asked: "What would be our endgame [in further examining the credit issue]? What are we trying to get at?"

Mr. McRaith responded that the purpose of gathering such information and producing a report will be to discern the rhetoric from the facts in order to provide accurate information to those who need it.

Credit scoring has been attacked by opponents as failing to account for major, unusual expenses such as large medical bills, as well as unfairly impacting low-income and minority consumers.

Insurers respond that credit scoring is a proven underwriting technique that rewards those who are good risks, and that there is a correlation between credit and insurance risk.

Mr. McRaith said if there is going to be "significant change" in the states on credit-based insurance scores, it will likely be through laws passed by state legislatures.

"My view is the service we should provide is information," he said, adding that regulators cannot attempt to resolve the social or policy questions surrounding the credit issue, "but we can inform those who have that responsibility with some objective, factual data about the impact on consumers."

One area the committee wants to understand better is the range of impact of insurance scores on consumers.

South Carolina Insurance Director Scott Richardson said his department did a data call in his state asking how insurers used credit information, noting he was "stunned" at the impact credit had on rates.

For homeowners insurance, Mr. Richardson said credit accounted for savings in a range of 7.6 percent to 51 percent per policy for consumers that benefited from their insurance score, and a surcharge of 1 percent to 86 percent for consumers who were adversely affected.

For auto insurance, Mr. Richardson noted, consumers benefited up to 36 percent per policy, and were adversely impacted by a range of 12 percent to 99 percent.

He stressed that he did not know how many people were in the extreme ranges, but indicated that is information regulators should seek to collect.

Commissioner Sullivan, while offering support for the collection of data, wondered where it ends, and whether the committee will start examining other areas beyond credit. "This could be endless," he said.

In fact, Mr. Richardson pointed out that regulators may want to get a handle on what factors insurers use to determine rates beyond credit. He said the technical aspects of underwriting have gotten to a point "where we need to talk about what is fair."

Next September, Director McRaith indicated he would like to take a look at marital status as a rating factor.

For now, however, Mr. McRaith said the goal is to "identify questions that we want answers to, and not with the intent of attacking or antagonizing an industry or any one company."

A second component, he said, would be to explore regulating advisory companies that develop credit-based insurance scores. To do that, Mr. McRaith said the NAIC would have to develop a model law for states that don't have the authority to regulate these companies.

Dave Snyder, American Insurance Association vice president and associate general counsel, said the issue of credit has been reviewed and re-reviewed and has been shown to be compliant with the law and beneficial to the market and a large majority of consumers.