PCI Expresses Concerns on States’ Credit Scoring Study

May 5, 2004

The Property Casualty Insurers Association of America has issued a bulletin expressing serious legal and public policy concerns about a multi-state study being conducted by insurance regulators on the “impact of credit-based insurance scoring on certain groups of consumers.”

The PCI noted that a data call, the first step in the process of conducting the study, was sent to major personal lines insurers by several insurance departments this week.

“From the limited information regulators have shared with us, this study appears to be a conclusion in search of the facts,” stated Robert Zeman, PCI senior vice president, insurance and regulatory affairs. “A few individuals who are adamantly opposed to the use of insurance scores are trying to create reasons why this important and valid underwriting and rating tool should be banned. Unfortunately, if the study follows the methodology used in previous research projects it will fail to recognize the most important factor considered by every insurance company when writing a policy – risk of loss.”

It has been reported that states including Alabama, Indiana, Kansas, Louisiana, Maryland, Michigan, Missouri, Montana, Nevada, Oregon, Washington, and West Virginia, have issued data calls. However, the data call notice sent to insurers by the Indiana Department of Insurance indicates that 15 states are participating in the study. The PCI noted that the “Missouri Insurance Department is coordinating the study, and said it is “concerned that the project will mirror a flawed study conducted by Missouri regulators earlier this year.”

“The missing link in the Missouri study – and presumably in the study to be conducted by other states – is that the methodology failed to take into account policyholders’ loss experience. Insurers do not collect information on race, ethnicity, or income. They only compile data on risk factors and apply each factor equally to every consumer,” Zeman stressed.

PCI pointed out that individual consumers in any given geographic area will have a wide range of credit-based insurance scores. The use of credit histories allows companies to charge lower premiums to consumers within a rating territory who manage their assets responsibly. Insurance scores distribute the cost of coverage more equitably within a community where losses are incurred. Insurance scores do not move insurance costs between low-income and wealthier communities or neighborhoods.

“These states have undertaken this study despite the fact that the National Association of Insurance Commissioners Credit Scoring Working Group has consistently rejected this approach. More importantly, these studies fly in the face of laws enacted by dozens of states over the past three years that allow insurers to use credit histories with reasonable regulatory protections,” Zeman noted.

He encouraged state insurance departments and the NAIC to become involved in the study on the impact of credit scores on consumers that will be conducted by the Federal Trade Commission over the next 18 months. The FTC study is required by the Fair and Accurate Credit Transactions Act, the law passed by Congress earlier this year that reauthorizes the federal Fair Credit Reporting Act. The FCRA has allowed insurers to use credit history to underwrite and rate automobile and homeowners policies since 1970.

“The FTC study will be the most comprehensive of its kind,” Zeman stated. “It will explore the impact – both positive and negative – of credit reports on consumers, not just in insurance pricing, but financial services, housing and employment. We have serious legal and public policy concerns when states conduct politically motivated studies based on poorly designed research parameters.”

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