III’s Hartwig Defends Insurer Use of Credit-Based Insurance Scores

In spite of a record-high jobless rate and grim prospects for an economic turnaround, U.S. consumers are shedding debt and spending more responsibly. The end result for many Americans is a higher credit score, according to Dr. Robert Hartwig, president of the Insurance Information Institute (I.I.I.), who testified before the National Association of Insurance Commissioners (NAIC).

In fact, testified Hartwig, 43% of U.S. consumers increased their credit score earlier this year, while only 27% saw a decrease, and 30% remained unchanged. Hartwig quoted San Francisco-based a March 2009 Credit Karma report that was based on a sampling of tens of thousands of U.S. consumers.

Hartwig’s remarks about consumers seeing an economic “silver lining” came this week as part of his formal testimony during the NAIC’s public hearing on the impact of credit-based insurance scores on consumers.

Hartwig pointed out that insurers have used this rating criterion for almost 20 years in order to differentiate effectively between lower and higher insurance risks.

“Insurance scoring is a proven, accurate, objective and consistent risk assessment tool used widely in the underwriting of auto and homeowners insurance,” Hartwig testified. “The data supporting its use are statistically irrefutable, and the benefits to consumers are significant. Moreover, the use of credit information leads directly to a fairer and equitable premium charge for all policyholders because scoring allows premiums to be more closely matched to risk.”

The NAIC’s hearing comes at a time when numerous state legislatures are considering laws that would either restrict, or ban outright, an insurer’s use of credit-based insurance scores when rating potential auto and homeowners insurance policyholders, or determining the premium they should charge for these products.

Addressing the ongoing controversy associated with insurers using credit score data, Hartwig said, “Importantly, insurance scores incorporate only those elements from credit reports that correlate with future loss.”

“Prohibiting insurers from using credit-based insurance scores would instantaneously result in inherently unfair outcomes: higher rates for people with lower risk, and lower rates for those with a higher likelihood of submitting claims,” he said. “In other words, bans or severe restrictions on insurer use of credit-based insurance scores would lead to massive subsidies for people who impose greater costs on the system.”

The I.I.I. president also noted that the property/casualty insurance industry’s risk management model had proven more resilient during the current economic downturn than that employed by U.S. banks, in part because of the ability of P&C insurers to measure the financial histories of the customers with whom they conducted business.