AAI Recommends Change to Del. Credit Information Regulation; Says Credit Score Important Tool for Identifying Risks

April 22, 2003

A measure proposed by the Delaware Department of Insurance aimed at regulating property/casualty insurers’ use of credit-based insurance scores needs further changes to strike a reasonable balance between the needs of all affected parties, the Alliance of American Insurers (AAI) told a departmental hearing today.

“For the most part, we believe that the proposed regulation strikes a reasonable balance that addresses the business needs of insurers and the personal lines insurance marketplace with the concerns of consumers. There are, however, certain provisions that are unnecessary or may be technically or legally impossible for insurers to comply with,” Richard Stokes, government affairs representative for the Alliance’s Northeast Region, testified. “Several conflicting requirements in the regulation (Regulation No. 906 – Use of Credit Information) will only add unnecessary costs for insurers and confusion for consumers.”

In particular, he pointed out a section of the regulation that would require detailed written notices be sent to consumers. “Insurers may not be able to comply with portions of this requirement because it would appear to require specific account or payment information,” Stokes said. “One of the benefits of a credit score is that it provides a reliable profile of a consumer’s credit habits WITHOUT revealing specific, potentially personal or sensitive, information.”

In addition, Stokes identified several other sections of the proposed regulation that would be problematic for insurers because they either conflicted with current Delaware insurance law and/or provisions of the federal Fair Credit Reporting Act.

However, Stokes praised the proposal’s overall goal of permitting insurers to continue to use credit information. “Credit-based insurance scores are an effective risk determinant for insurers because they objectively measure the subjective factors of responsibility and stability. In this way their use provides key benefits for consumers, such as availability and consumer choice,” he told the hearing.

“The use of credit reports and scores provides insurers with a greater opportunity to write business in all markets,” he explained. “In fact, use of credit data increases risk predictability and can improve the chance an insurer will accept a risk. By adding another level of sophistication to the process, the scores allow insurers to underwrite and price business with a greater degree of certainty. This enables consumers to obtain coverage at more accurate rates.”

Stokes noted that industry-wide, at least two-thirds of policyholders subject to credit scoring considerations receive lower, or discounted, rates due to their favorable credit.

So far this year, bills regulating insurer use of credit information have been enacted in seven states: Colorado, Kansas, Nebraska, North Dakota, Oklahoma, Virginia and Wyoming.

In addition, the Alliance has tracked no fewer than 95 introduced bills and/or regulations in 41 states related to this subject this legislative session. Over half of these states have versions of the National Conference of Insurance Legislators (NCOIL) Model Act pending.

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