PCI Urges NAIC to Drop Insurance Scoring “Best Practices;” Focus on Consumer Education

July 9, 2004

A bulletin from the Property Casualty Insurers Association of America urges the National Association of Insurance Commissioners to stop work on insurance scoring “best practices” and develop consumer education materials on the use of credit-based insurance scores.

The PCI argues that this would “better serve consumers,” rather than trying to impose “best practices” recommendations on states that have already enacted legislation governing the use of such scores.

The NAIC Credit Scoring Working Group had distributed a draft of its “so-called ‘best practices’ guidelines” for interpreting various provisions of state insurance scoring laws before the June NAIC meeting. The working group invited interested parties to comment on the draft and plans to discuss the comments on the draft and possible action on the proposal via a conference call next week.

“Dozens of states have enacted laws regulating the use of insurance scores,” stated Robert Zeman, PCI senior VP – industry and regulatory affairs. “Most of these laws are based on the provisions of the model law developed by the National Conference of Insurance Legislators (NCOIL), which addresses many of the provisions in the working group’s ‘best practices’ draft. We believe state legislators are perfectly capable of interpreting the intent and parameters of the laws they enact. Imposing arbitrary standards on existing legislation is confusing and counterproductive.”

In a written statement to the working group, PCI wrote: “We believe that the NAIC Credit Scoring Working Group is in a position to more successfully advocate consumer education with respect to credit-based insurance scoring. Resources would be better used on developing consumer education pieces on how insurers use credit information, consumers’ rights under federal law and how consumers may improve their credit records.”

The PCI said it objects to the working group’s statement of purpose for its “best practices” document because it proposes to have NAIC identify and recommend the best regulatory practices to be used by the states, many of whom already have laws on credit scoring in place. In particular, PCI objected to the statement that says the goal of the document would be to “provide recommendations to modify existing language of statutes on regulations where such language no longer represents the best regulatory practices.”

“Although the NAIC Working Group said its intent is not to alter or amend applicable state law, create a cause of action, or impose limitations on insurers that do not exist under the law, PCI contends the best practices document does just that,” Zeman observed. “This document does question the wisdom and sovereignty of state legislatures in enacting state laws.”

The bulletin noted that the “best practices” proposal addresses the following areas: Adverse Action; Extraordinary Life Circumstances; Neutral Score/No Hit; Scoring Model Submission Standards; Sole Factor Prohibition and Periodic Review of Insurance Scores. PCI contends that the “best practices” document would foster the need to amend the laws of several states and impose several limitations and requirements on insurers not now found in state law for all the area addressed.

“The definition of adverse action embraced by this document is overly broad and would amend current law and create new requirements for insurers,” Zeman added. “The definition of adverse action found in the Fair Credit Reporting Act (FRCA), the National Conference of Insurance Legislators’ (NCOIL) model and the laws of most states is very clear and we recommend that the working group refer to those definitions.”

Scoring Model Submission Standards that require insurers to file their model or algorithm are not necessary and may impede speed to market PCI said. A better approach would be for insurers or vendors to certify that the model complies with existing state law, Zeman indicated.

The PCI reiterated its support of the NCOIL Model Act language on the Sole Factor Prohibition. The NCOIL model language “prohibits insurers from denying, canceling or nonrenewing a policy of personal insurance on the basis of credit information without consideration of any other applicable underwriting factor…”

It is unclear what action the working group will take, following the conference call to discuss the final draft, scheduled for June 13. But Zeman concluded: “PCI hopes that the Working Group will take our comments seriously and consider a course of action that will follow the path of consumer education rather than its current direction of second guessing legislators’ judgment on insurance scoring in state legislatures around the country.”

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