Organizations are speaking out after the National Association of Insurance Commissioners’ (NAIC) announcement last week that it adopted a proposal to review the use of credit-based insurance scoring.

Florida state CFO Alex Sink held a press conference last week to oppose the use of credit scoring when determining the rates and availability of auto insurance for Floridians.

“Right now, people whose credit is reduced or who have been hit hard financially could see their auto insurance rates jacked up, or find they are not even able to get coverage—and that’s just wrong,” said Sink.

Sink noted that she has been unimpressed by explanations from auto insurance companies about why they need to use credit scores, especially in these challenging economic times.

In response to Sink’s press conference, Workmen’s Auto Insurance Co. released a statement that it has never used an individual’s credit when considering their eligibility or determining their insurance premium.

“Your credit is your business, not ours,” says Workmen’s Auto president and CEO Nicholas Lannutti. “Given the current state of the economy, we would like to reassure our policyholders that the price they pay for insurance with Workmen’s Auto is, and will continue to be, based on factors such as their driving record, where they live and the coverages they desire, not on their credit score.”

The NAIC will convene a public hearing to take testimony on:

• What is a credit-based insurance score?

• How does the insurance industry use credit-based insurance scores for pricing and underwriting?

• What is the impact on policyholder premium from credit-based insurance scores in light of the current economic conditions?

“This is a critical issue for the NAIC to consider as part of the 2009 consumer liaison agenda,” says New Mexico Insurance Superintendent Morris Chavez, who chairs the NAIC/Consumer Liaison Committee. “In this challenging economy, it is essential that insurance regulators have the necessary tools to prevent collapsing credit markets from unfairly impacting consumers.”

On the other side of the debate, the Property Casualty Insurers Association of America (PCI) has continuously advocated credit scoring. Just last week, the association urged the Maryland Senate Finance Committee to reject SB 797, which would harm most consumers by banning insurers from using credit information in rating automobile insurance.

Maryland already has one of the most restrictive laws in the country regarding an insurer’s use of credit information in underwriting and rating for homeowners and auto insurance, PCI says. State law prohibits homeowners insurers from using credit information in underwriting or rating. The law also prohibits private passenger automobile insurers from using credit information for underwriting, but allows such information in rating new policies within 40% rate collars—either a surcharge or discount of up to 40%.

“Credit-based insurance scoring allows insurers to set rates appropriately and ensure that policyholders are charged based on their risk of loss,” says Richard Stokes, regional manager and counsel for PCI. “Legislation banning or restraining the use of this tool would hurt policyholders’ ability to secure lower costs and deprive insurers of one of their most predictive underwriting tools. Consumers want to pay a fair price for insurance that matches their risk of loss. To achieve the goal of pricing based on an individual’s risk of loss; insurers simply want to use the most accurate, statistically valid tools available and credit information has proven to be one of the best predictors of loss.”

According to the NAIC, 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

• Some states prohibit the use of credit-based insurance scores

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