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NAIC Hearing: Credit-Based Insurance Scoring Benefiting Consumers

Source: PCI

Posted on 01 May 2009

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The American Insurance Association (AIA), National Association of Mutual Insurance Companies (NAMIC) and Property Casualty Insurers Association of America (PCI) joined with a panel of credit information and economic experts at a special hearing of the National Association of Insurance Commissioners (NAIC) to present the facts about how consumers continue to benefit from the use of credit-based insurance scoring despite a rough economy.

“Over the past 10 to 15 years during which the use of insurance scoring has become nearly universal, the economy has experienced two recessions and enormous variations in economic growth and employment across states. Insurance scores have been proven to remain highly accurate predictors of future loss throughout the entirety of this period,” said Dr. Robert P. Hartwig, CPCU, president and economist of the Insurance Information Institute.

Stuart K. Pratt, president and CEO of the Consumer Data Industry Association said that, “Studies of credit reports done by the credit reporting industry and federal agencies over the last several years show that the information in credit reports is accurate, and reliable in assessing risk. For instance, a review of over 52 million consumer credit reports showed that less than two percent resulted in disputed data being deleted because it was not accurate.”

LexisNexis reports that analysis of recent insurance score trends does not reflect an overall deterioration of scores. National insurance score trends have held steady over the past year for both the company’s Attract Auto and Attract Property scores. In fact, of the millions of scores processed by LexisNexis, a slight score improvement has been recorded over the past five years.

Supported by numerous credible studies and public testimony from individual companies, insurers once again made the point at the NAIC’s hearing today that credit-based insurance scoring is an objective, reliable underwriting and/or rating tool that benefits a majority of consumers. For example:

·Some companies have testified publicly in state legislative committees in recent years that 75% or more of their auto and homeowners customers receive discounts because of their good credit histories.

·A 2008 Arkansas Department of Insurance study reported that “91% of consumers either received a discount for credit or it had no effect on their premium” and “for those policies in which credit played some role in determining the final premium, those receiving a decrease outnumbered those who received an increase by 3.44 to 1.” (bolding is report’s emphasis)

·The Federal Trade Commission’s (FTC) 2007 study on credit indicated that when scoring is used, 59% of consumers would see premium decreases and “credit-based insurance scores are effective predictors of risk under automobile policies.”

“Self-styled consumer advocates bear the burden of proof to back their allegations that large numbers of consumers are harmed by credit-based insurance scores because the studies, today’s testimony and the fact that complaints remain low would prove otherwise. The fact is a majority of consumers directly benefit from credit-based insurance scoring,” said David Snyder, AIA vice president and associate general counsel.

“We hope that after reviewing this well-established rating tool, the NAIC will agree that what we’ve seen for more than the past decade remains true today: that credit-based insurance scores have led to more fair and accurate pricing for consumers through improved risk assessment for insurers,” said Neil Alldredge, NAMIC’s vice president for state and policy affairs.

“Insurance is one of the most highly regulated industries in the United States, with laws and regulations in place to prevent insurance companies from charging consumers excessive, inadequate or unfairly discriminatory rates. On top of that, any rating factor insurers’ use, including credit-based insurance scores, is subject to state and federal antidiscrimination laws. Regulators across the country for many years now have repeatedly approved the use of insurance scoring as actuarially justified and nondiscriminatory,” said Deirdre Manna, PCI vice president of industry, regulatory and political affairs.

Insurers do not use credit-based insurance scores as the sole criteria in insurance underwriting or pricing decisions. Credit information is just one of several factors that go into the process. Other factors include driving record (prior accidents, moving violations), where a car is garaged, and age and type of car. In fact, the majority of states prohibit insurers form using credit as the sole criteria in underwriting and pricing decisions.

Almost every state regulates the use of credit-based insurance scores to some degree. Most state laws or regulations are based, in whole or in part, on the National Conference of Insurance Legislators (NCOIL) Model Law on Credit, legislation that includes several important consumer protection provisions. The model requires insurers to disclose their use of credit information, regulates what information can be used to calculate a score and requires insurance companies to re-underwrite and re-rate a policy if credit report information is amended via the FCRA’s dispute resolution process. A number of states also require companies provide exceptions in their use of credit information for anyone suffering an “extraordinary life circumstance” such as divorce, temporary unemployment or catastrophic illness or injury.