Fight Over Credit Ban Moves to Colo. Senate Floor

March 22, 2005

Legislation that would prohibit insurers’ use of credit information narrowly advanced out of the Colorado Senate State Affairs Committee Monday on a 4-3 vote and will be opposed by the insurance industry on the Senate floor, according to the Property Casualty Insurers Association of America (PCI).

Earlier this session, the insurance committees in both the Colorado House and Senate defeated bills that would have banned insurers’ use of credit information. However, a third bill (SB 195) was introduced and assigned to the State Affairs Committee, which includes many legislators who were more inclined to oppose insurers’ use of credit information.

“Senate Bill 195 will be vigorously opposed by the insurance industry on the Senate floor,” said Michael Harrold, assistant vice president and regional manager for PCI. “This legislation is unfair to consumers who are less likely to file a claim and should pay lower premiums. Legislators on the insurance committees recognized that most of their constituents would be harmed by a ban on credit information and rejected measures that would ban insurance scoring. Insurance scoring has been demonstrated to make pricing more accurate. It helps insurers develop a more complete picture of an individual’s risk of loss. While, some legislators think that banning insurance scoring is good politics, the end result is not good public policy.”

Colorado’s current law passed in 2004 is in the mainstream of how states govern the use of credit information by insurers. Colorado adopted the National Conference of Insurance Legislators (NCOIL) Model Insurance Scoring Act, which allows insurers to use credit information and requires companies to notify applicants for insurance that credit information will be used for underwriting or rating.

The law prohibits insurers from denying, canceling or non-renewing policies solely on the basis of credit information. In addition, the law mandates that insurers provide consumers with reasons for any “adverse action” taken as a result of their credit history. However, the Colorado law reportedly goes beyond the NCOIL model and protects consumers from adverse actions based on identity theft or the negative credit information of a former spouse.

Insurance companies report that on average two-thirds of their customers have lower premiums due to a good credit-based insurance score. If companies were prohibited from using insurance scores, the best risk customers end up paying more to subsidize higher risk consumers.

“This legislation would also be disruptive to Colorado’s automobile insurance market, which is currently adjusting to the tort-based automobile insurance system that went into effect in July 2003”, said Harrold. “Since the transition to a tort-based system, automobile insurance rates have dropped significantly. However, a ban on insurance scoring would send an unnecessary shock wave throughout the insurance system and cause unjustified rate increases for the lowest risk consumers.”

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