NAMIC: Credit-Based Scoring in Renewal Policy Underwriting Essential for Accuracy

August 17, 2005

The National Association of Mutual Insurance Companies (NAMIC) will testify at an Alaska Division of Insurance (DOI) hearing that, “at renewal, insurance carriers need the flexibility to engage in a total circumstances analysis of the basis for the change in a consumer’s credit score to ensure that consumers receive a premium rate that is commensurate with their current potential risk of loss exposure.”

NAMIC’s Aug. 30 testimony is in response to proposed regulations that would prohibit the use of credit-based insurance scoring in renewal of insurance policy underwriting.

The proposed regulations concern NAMIC because “they categorically prohibit the consideration of credit scores in policy renewal situations without consideration of the factual basis for the change in the consumer’s credit score,” stated State Affairs Manager, Christian Rataj.

In essence, the proposed regulations:

1) outline the requirements for an acceptable insurance scoring model;
2) set forth the statistical validation required for an acceptable insurance scoring model;
3) prohibit the use of credit histories in insurance policy renewals, unless the consumer waives the requirement in writing; and
4) limit how an insurer may use a “neutral credit” history report.

NAMIC will suggest that the DOI consider drafting a provision that
“affords insurance carriers an opportunity to evaluate all risk-of-loss
based variables necessary for the carrier to determine if the insurance
renewal applicant has had a change in circumstances that correlates to an increased potential for claims exposure,” stated Rataj.

NAMIC has been a staunch supporter of underwriting freedom and the use of credit-based insurance scoring because there is an irrefutable
correlation between a consumer’s credit score and his potential risk of loss exposure.

“Since insurance underwriting is founded upon the sound actuarial premise that insurance premiums must be correlated to the potential risk of loss exposure, i.e. the predicted frequency and severity of insurance claim filings, insurance carriers must not be unduly restricted by credit scoring regulations that infringe upon the carrier’s ability to gather information necessary to the underwriting process,” stated Rataj.

“The insurance industry and its consumers benefit from a thorough,
complete and accurate analysis of risk of loss exposure. Any regulation or legislation that impairs an insurance carrier’s ability to honor its contractual duty to provide the consumer with an insurance rate commensurate with his particular risk of loss exposure, is detrimental to the consumer the regulation is attempting to protect,” added Rataj.

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