With public concern about credits scores far from extinguished, 11 state insurance departments-dubbed "the coalition of the willing"-are planning to conduct their own multi-state study of the effects of credit-based insurance scoring on consumers.The 11 states-Alabama, Indiana, Louisiana, Maryland, Michigan, Missouri, Montana, Nevada, Oregon, Washington and West Virginia-have issued calls to insurance companies for individual policyholder data in order to conduct their research on the effects of scores, which insurers use to price auto and homeowners policies.

Meanwhile, the Federal Trade Comm-ission (FTC), in conjunction with the Federal Reserve Board, is beginning its own research on credit scores. The FTC/Fed study is mandated by the Fair and Accurate Credit Transactions Act (FACT), which was signed into law late last year.

Not surprisingly, the Property Casualty Insurers Association of America (PCI), an industry trade group with 1,000 member companies, opposes the 11 state regulators' further scrutiny.

"These states have undertaken this study despite the fact that the NAIC (National Association of Insurance Commissioners) Credit Scoring Work-ing Group has consistently rejected this approach," says Robert Zeman, senior vice president, insurance and regulatory affairs at the Property Casualty Insurers Association of America (PCI), Des Plaines, Ill.

The NAIC working group was considering whether to study credit scoring, but decided against the proposal, in part, because the passage of FACT-which included the FTC/Fed study-was imminent.

The coalition of the willing

In the final analysis, the NAIC position was that individual states-those that were willing-could proceed with their own study or studies, according to Randy McConnell, communications director for the Missouri Department of Insurance (MDI), which is coordinating the multi-state research project.

Missouri conducted its own credit scoring research last year, finding that the practice had a disparate impact on low-income and minority populations. That study, which was based on aggregate level data, was criticized by the PCI for its methodology (see "Minorities and Low-Income Harmed," March 2004).

"The missing link in the Missouri study-and presumably in the study to be conducted by the states-is the methodology failed to take into account policyholder' loss experience," says PCI's Zeman. "Insurers do not collect information on race, ethnicity or income. They only compile data on risk factors and apply each factor equally."

But MDI's McConnell insists the multi-state study will not be a replication of the one conducted in Missouri.

"Our original request for data (from insurers) for the Missouri study was only for some average figures by ZIP code," he says. "The request that has gone out to the companies (for the multi-state study) is for individual policyholder data." As a result, the new research will examine the relationship between loss and credit scoring, as well the effects of scores on insurance premiums.

"These studies fly in the face of laws enacted by dozens of states over the past three years that allow insurers to use credit histories with reasonable regulatory protections," Zeman says.

What's more, the state statutes, as well as the federal law requiring the FTC study, have been carefully crafted with input from all stakeholders, he notes.

"Contrast that process with the so-called 'coalition of the willing,' which developed its research parameters without discussion among other interested parties, such as insurers, regulators, consumers and agents."

Unnecessary, inefficient

Furthermore, Zeman notes, the FTC is already required to conduct comprehensive research on the topic, as well as some states, such as Texas-which is mandated by state law. So the multi-state study is unnecessary and inefficient, he says.

The FTC is in discussions with the 11 states to negotiate access to the data the states collect, according to Jesse Leary, deputy assistant director in the division of consumer protection at the FTC. "But what the states do and the conclusions they draw will be their own. And what we do and the conclusions we draw will be done by us and the Fed."

At press time, PCI was meeting with its members to discuss the multi-state study. Zeman could not say whether they would take legal action to prevent the turnover of data to the states. Currently, the states plan to complete their study by the end of this year. The FTC expects to release its report in late 2005.

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