N.D. Enacts NCOIL Scoring Model; Kan. Bill Sent to Governor

April 10, 2003

Legislation regulating the use of credit-based insurance
scores was recently signed by North Dakota’s governor and has passed the Kansas legislature. Three other states, Colorado, Virginia and Wyoming have enacted legislation this year.

North Dakota became the first state to enact legislation (HB1260) that is based entirely on model legislation developed by the National Conference of Insurance Legislators (NCOIL). The Kansas bill (HB2071) includes language from the NCOIL model, recommendations from the task force study called for by the legislature last year and input from the insurance commissioner.

The NCOIL model prohibits insurers from using credit information as the sole basis for denying, canceling or non-renewing a policy or increasing rates.

Insurers are presented with three options regarding the treatment of
consumers with very little or no credit history. This information can be used if the insurer is able to demonstrate to the insurance commissioner that the absence of credit information is related to risk of loss.

Otherwise, the insurer must treat the consumer as if he or she had neutral credit information or exclude the use of credit information as a factor. Insurers must also file their scoring models with the department of insurance and that filing is considered a trade secret.

“Insurers were supportive of the bill that passed in North Dakota,” said Laura Kotelman, counsel for the National Association of Independent Insurers (NAII).

“This bill presented a workable solution that provided a good framework for how credit information is to be used by insurers. The NCOIL model has been useful in helping legislators find a compromise approach that does not significantly diminish the value of this highly predictive tool.”

In both Kansas and North Dakota, legislators also introduced bills that would have placed severe restrictions on insurance scoring.

“While the legislation that passed in Kansas was preferable to the bill that would have rendered insurance scoring ineffective, it does not provide enough latitude in how insurers handle consumers that have little or no credit history,” said Ann Weber, counsel for NAII.

“HB 2071 deviates from the NCOIL model in the treatment of “no-hits” by only permitting insurers to exclude this information or treat it as a neutral factor. NAII vigorously sought to have the NCOIL model
language followed in this area and include the option that would permit insurers to use this information if it was actuarially justified. The restriction places constraints on one of the predictive factors.”

NAII is also seeking to address the issue of no-hits in Illinois. House Bill 1640, which is based on the NCOIL model, needs to be amended in order to conform to Illinois’ insurance rating law.

“Under the current bill, in order to consider the absence of credit information, insurers would be required to justify their treatment of no hits and obtain department approval. This requirement in essence would negatively affect Illinois’ rating law and be a step towards a prior approval system. We are urging the Senate to fix this unintended consequence of implementing the model act,” said Kotelman.

Nebraska’s legislature is poised to pass LB487, which is now based on the NCOIL model. NAII was successful in getting the bill amended so that it follows the NCOIL model by providing trade secret status to scoring models filed with the insurance department.

NAII, based in suburban Chicago, is a leading property/casualty insurance company trade association. Its more than 715 member companies write more than $101 billion in annual premium, more than 32 percent of the nation’s property/casualty insurance.

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