NAMIC Issues Policy Paper on ‘Disparate Impact’ Theory for Credit Scoring

July 8, 2004

The National Association of Mutual Insurance Companies has prepared and released a bulletin attacking efforts to apply the “disparate impact” legal standard to the use of credit-based insurance scores.

The paper, which was also distributed by the American Insurance Association and the Property Casualty Insurers Association of America, states that such efforts “ignore case law, federal authorization of the practice, state laws that protect consumers from unfair discrimination and the benefits consumers derive from its use.”

The study, entitled The Legal Theory of Disparate Impact Does Not Apply to the Regulation of Credit-Based Insurance Scoring, offers “a critical analysis of current efforts to extend the disparate impact legal theory to the use of credit-based insurance scoring, exposing the theory’s inherent flaws and highlights the special difficulties that arise when the theory is applied to situations other than employment discrimination litigation,” said the bulletin announcing its release.

“The use and regulation of credit-based insurance scoring for underwriting and rating purposes is a challenging issue facing public policymakers and insurance companies,” according to Roger H. Schmelzer, NAMIC Sr. VP for State and Regulatory Affairs. “One lesson learned from working in the states on almost any insurance issue, but especially in regard to credit-based insurance scoring, is the need for more information on the public policy consequences of new laws that could change the way companies conduct their business, ultimately harming consumers.”

Schmelzer added that the NAMIC was “very pleased to distribute this paper with our property-casualty advocacy colleagues at the AIA and PCI. NAMIC respects both organizations and is grateful for their contributions.” He noted that the joint distribution serves as a powerful statement that the P/C industry is united on this issue.

According to Schmelzer, some regulators oppose the use of credit-based insurance scoring while legislators continue to introduce bills that would curtail or abolish credit-based insurance scoring. Opponents often base their efforts on statistics that suggest an adverse impact on racial and ethnic minorities. The term “disparate impact” is sometimes used as shorthand for these statistics when discussing credit-based insurance scoring in this public policy context.

However, Schmelzer continued, “‘disparate impact’ is a specific legal standard that has not been applied to insurance and in any case, cannot legitimately be invoked if based merely on a statistical conclusion. The paper explains why caution should be used before considering transfer of the term to insurance, especially in a non-judicial setting.”

The NAMIC cited the following facts in support of its position:
— While federal courts use a multi-part analysis to determine existence of a disparate impact, they have done so in structured legal settings: Title VII employment discrimination cases and under the Federal Housing Act. The analysis has not been applied to insurance.
— Where it is applied under federal case law, analysis of a disparate impact claim comes with standards of proof and affirmative defenses for adjudicating particular disputes between discrete parties. If ever used to evaluate an insurance-related complaint, the doctrine would undoubtedly permit individual insurers to defend their use of insurance scoring by showing that it serves a legitimate business purpose.
— On the relatively few occasions when the disparate impact theory has been applied to areas similar to insurance, such as mortgage lending and the granting of credit, courts have found it necessary to modify the theory, making it easier to defend challenged practices.
— In 2003, Congress expressly reauthorized the use of credit information for insurance purposes. States may not use their authority to circumvent laws passed by Congress.
— State laws permit the classification of risk and the pricing of insurance according to the risk accepted by the insurer. These practices are heavily regulated by state departments of insurance to assure solvency in addition to fair and actuarially-sound benefits for insurance consumers.

The paper also lists what it called the “two most compelling reasons for caution:”
— The majority of consumers benefit by paying less for insurance because of the positive impact of their credit-based insurance score.
— Insurance scoring allows companies to write more business. The ability to more
accurately predict the risk of loss allows insurers to insure more consumers. Whenchoices for consumers are increased, a positive influence on price generally ensues.”

The paper can be downloaded at NAMIC’s Website,

Was this article valuable?

Here are more articles you may enjoy.