INN's Senior Managing Editor Carrie Burns’ recent article discussed the continued debate around credit-based insurance scoring. The article sparks a question: How does credit-scoring relate to the growing momentum for an Optional Federal Charter (OFC)? There is no better example of the inefficiencies of the state regulatory system and need for an OFC than credit-based insurance.

The National Association of Insurance Commissioners (NAIC) reported that 48 states have taken some form of legislative or regulatory action limiting the use of credit-based insurance scores, including:

• Some states have limited the use of credit-based insurance scoring, requiring that it not be the sole rating factor used by insurers to evaluate risk

• Some states believe that the process itself is not intended to be discriminatory, and any disparate impact based on race or ethnicity is merely coincidental

• Some states believe that a majority of policyholders benefit from the use of credit scoring

• Some states have taken issue with the use of credit scores and other rating criteria, such as occupation and education

The current state of credit scoring reflects the disorganized nature of state regulatory processes. But under an OFC, which would benefit consumers and insurers, a unified federal system would create a streamlined process for insurers to expand distribution and lower administrative costs, providing more product choices and more pricing options for policyholders.

There is growing support for the OFC from both traditional agent-based firms and online direct insurers. Allstate’s (the nation’s second-largest auto insurer, with 14,000 agents) CEO Tom Wilson called for a federal insurance charter to cover the insurance industry in a speech in March. Wilson said,” This would allow strong consumer protections and uniform regulation across states, which, in turn, would lower administrative costs and improve access to new and innovative products.”

Online direct insurers, such as Esurance, support the benefits of federal regulation for insurers and consumers. Kristin Brewe, director of brand and public relations for Esurance, says, “As a company that always feels a little healthy competition is good for consumers and, thus, good for business, Esurance is strongly in favor of an optional federal charter.”

Brewe continues, “The individual state regulations represent a large barrier to entry for emerging companies like ours. For example, one state requires bar codes on ID cards, while another requires a form to be printed in a special font type and size. Obviously, this slows us down in entering states, along with other companies, meaning that consumers suffer because there's less competition, which means higher rates for insurance.”

U.S. lawmakers, consumers and insurers need look no further than the U.K. for evidence supporting a unified, federal regular system.

“As for the effect on consumer rates, the U.K. market is a great example of a single, unified national market where consumers benefit from lower prices due to very strong competition, encouraged by national regulation,” Brewe adds. “Prices are much lower in the U.K., and offers can be much more innovative and consumer-friendly, due to this regulatory aspect to their market.”

Direct and agent-based insurers also support the OFC. The NAIC’s own report shows several states believe that a majority of policyholders benefit from the use of credit scoring. Together consumers win, and in today’s economic crisis that would be welcome news for all U.S. consumers. Perhaps the recession and new White House administration will create the perfect storm to stop the debate around credit scoring and the OFC, and we may finally see some action.

Chad Mitchell is a senior analyst with Forrester Research. He covers trends in global insurance; eBusiness and channel strategy; emerging Web and call center technologies; consumer trends in researching and buying insurance; and best practices and rankings of leading insurers. He can be reached at

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