Advocates of the use of credit scores in personal lines underwriting and rating could be excused if they are feeling a bit under siege lately.The industry has been generally pleased with the actions of state legislatures that have supported carriers' use of consumers' credit information for approving policies and setting policy rates.

But a recent court decision, as well efforts by the National Association of Insurance Commissioners (NAIC) to press on with a study of the practices' alleged disproportionate impact on minority and low-income groups, could mark a significant shift in the wind in efforts to legitimize carriers' use of credit scoring on a national basis.

Moreover, Congress is getting putting its stamp on the credit-scoring issue. A federal study of disparate impact is called for under legislation passed in June by the House Financial Services Committee and scheduled to be taken up by the full House by the end of September.

The amendment was proposed by Rep. Luis Gutierrez, D-Ill., and calls for a comprehensive study by the Federal Trade Commission, in consultation with the Office of Fair Housing of the Dept. of Housing and Urban Development. The study will examine "effects of the use of credit scores and credit-based insurance scores on the availability and affordability of financial products and services, including credit cards, mortgages, auto loans and property and casualty insurance."

The provision is included in legislation that would extend provisions added to the Fair Credit Reporting Act set to expire at the end of the year, which pre-empted state privacy rules to create a national standard.

The provision was prompted by concerns that it unduly affects the poor, and also because of pressure from realtors, who fear that high homeowners insurance rates reduce their chances of selling a home.

The insurance industry is awaiting action on a similar bill in the Senate, and it is unclear whether the provision will survive.

When it passed a Financial Services Committee subcommittee, industry groups objected because they feared it was a harbinger of federal regulation of insurance. But it was made clear by the panel leadership that the provision would remain in the bill, and industry opposition became muted.

Legal challenge

On a separate front, a panel of the U.S. Fifth Circuit Court of Appeals, based in New Orleans, allowed a nationwide class-action suit alleging a concealed racial bias in credit scoring to proceed.

The industry argued that the McCarran Ferguson Act delegating the regulation of insurance to the states barred any application of the U.S. Fair Housing Act to the question.

The insurance industry made a similar argument against the Guitierrez amendment, also to no avail.

Lynn Knauf, policy manager for the Downers Grove, Ill.-based Alliance of American Insurers (AAI), says the ruling in the Fifth Circuit Court of Appeals ignored Texas law barring unfair discrimination and regulating the practice.

The disproportionate impact issue will be the subject of studies at the federal and state level if the Kansas City, Mo.-based NAIC proceeds as planned with its own credit scoring study, which has sparked industry ire.

Insurance groups maintain that it is impossible for insurers to determine race or ethnic group by a credit score. And the predictive value of the tool provides ample business reason for the practice, no matter what its putative impact, intentional or otherwise, on protected groups would be.

Critics maintain that any such disproportionate impact trumps all other questions.

Industry conflict

Oregon Insurance Administrator Joel Ario is determined to press on with the NAIC's study despite the industry browbeating he took in the weeks preceding the NAIC quarterly meeting in mid-September.

One critic is Dave Snyder, vice president of the Washington, D.C.-based American Insurance Association (AIA), who labels one NAIC draft proposal for the study as consisting of "shoddy methodology, and disturbingly biased assumptions about the ability of minorities and other ethnic groups to manage their personal affairs."

Ario, who chairs the NAIC Credit Scoring Working Group, says Snyder's attack indicates a "certain level of paranoia" on the part of the industry about the whole issue.

"We asked the AIA to be part of the process to help put together a reasonable study proposal from their perspective. And for some reason they chose not do that," Ario says. "Having people who are supposed to be helping us attacking the drafts obviously does not help the process."

At press time, the Credit Scoring Working Group was set to meet Sept. 15 to chart the next step in the NAIC's effort to get a grasp on the issue that has been a topic of debate in nearly all the state capitols, as well as Congress, for the past two years.

Regulators have come under fire for passing the buck to the National Conference of Insurance Legislators (NCOIL), which passed a model law adopted in more than a dozen states that industry maintains contains a number concessions aimed at mollifying critics.

But Ario says a lack of consensus among the regulators precluded any model law being developed by the NAIC.

At the heart of the matter is whether the use of credit scores as an underwriting and rating tool for personal lines policies unfairly impacts low-income and minority groups, and if it does, is that justified by the predictive value of the tool?

Ario believes both questions can be studied in any proposed project, but he wants as broad a consensus as possible before moving forward.

Industry representatives maintain that any study will be developed with a pre-determined outcome in mind.

And while the states have, with the exception of Maryland, refused to ban the practice other signs indicate that the situation may get a little dicey in the future.

In Massachusetts, a proposal to allow credit scoring for homeowners insurance was taken off the table in the wake of opposition from consumer groups and the state's inspector general, and it doesn't look like it will come back on any time soon.

"The NAIC is doing a study. Let's see if they come up with some answers to our concerns," says Massachusetts Insurance Commissioner Julianne Bowler.

Steve Tuckey is the New York-based editor for Insurance Chronicle, a Thomson Media publication.

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