N.Y. Assembly Credit Scoring Panel Hears Views of PIANY, Alliance, AIA

October 23, 2003

New York legislators yesterday heard T.J. Derella, President of the Professional Insurance Agents of New York State Inc.; Richard Stokes, Northeast Regional Manager of the Alliance of American Insurers, and David Snyder, vice president and assistant general counsel of the American Insurance Association express their views on credit scoring.

The New York State Assembly Standing Committee on Insurance and the Assembly Puerto Rican/Hispanic Task Force is currently holding hearings on the use of personal credit information and credit scoring by the insurance industry.

Derella indicated that credit scoring may be effective, but shouldn’t be the sole criteria to judge insurance risk. “I would compare credit scoring to the use of voicemail, which has evolved at about the same rate and over the same time period, from a novelty to a near-universal business tool,” Derella told the committees. “Like voicemail, credit scoring can be perceived as fair and user-friendly, or arbitrary and baffling, depending on the way companies design its interface with the consumer.”

Stokes defended the use of credit-based insurance scores as being “a proven indicator of future risk of loss,” and stressed that “insurers must be permitted to use this information to accurately underwrite auto and homeowners policies.” He noted that most states permitted their use, and stated that, “Once regulators and lawmakers look at the facts, and not the emotions surrounding the issue, they realize that policyholders who are financially responsible and have earned a good insurance score benefit from the use of credit-based insurance scores.”

Snyder voiced a similar theme, indicating that the “AIA believes that insurance scoring has increased choices for consumers in the state.” He also commented that using it had offset “many significant challenges, and stated, “in addition, it has enhanced the ability to identify better risks. The addition of credit provides new individual information in addition to accidents and violations and overlays the individual performance on the larger classifications such as territory and age.”

Derella stressed that the PIANY had studied the use of credit scoring “over a substantial period of time and has made several observations, including that companies do not use credit scoring in a uniform manner,” even though it has become “almost a universal practice by companies.”

“In a market-driven business, credit scoring has, or is perceived to have, a strong competitive advantage by companies,” Derella continued. “However valid credit scoring is as a predictor of risk, PIANY does not believe credit should be the SOLE underwriting criteria determining an underwriting decision to accept or reject a risk.” He also said credit should not be the sole reason for nonrenewal and companies should not raise premiums at renewal if a person’s credit deteriorates.

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