Washington — Consumers benefit when insurance companies use credit-based insurance scoring in underwriting and rating policies. That is the message the National Association of Mutual Insurance Companies (NAMIC) delivered to a congressional panel examining insurers’ use of credit-based insurance scoring yesterday.
This House Financial Services’ Subcommittee on Oversight and Investigations’ hearing is the second on the issue.
“Every serious study of the issue has reached the same findings: There is a strong correlation between credit information and the probability of a loss,” NAMIC said in its written testimony. “The same studies demonstrated that the use of credit enhanced the fairness of insurance underwriting by allowing insurers to offer coverage to more consumers, more accurately price policies and actually lower costs for the majority of insurance consumers.”
NAMIC pointed out that credit-based insurance scoring is not the sole criteria in insurance underwriting when determining risk-based pricing. Also considered are other important factors, such as driving record, age and type of vehicle, and where the vehicle is garaged, that enable insurers to make more accurate, objective, consistent, and timely underwriting and pricing decisions.
“Banning or limiting the use of any underwriting or rating factor that is known to be predictive of insurance losses leads to decreased coverage availability and higher insurance prices. History is littered with examples of how limitations on rating by geography, age of driver or other factors have destroyed competitive markets and driven up prices. A ban on the use of insurance scores would be counterproductive and would harm, rather than benefit, consumers,” NAMIC said.
An insurance company’s ability to more accurately predict losses is a critical component in accurately underwriting risks, and benefits consumers with lower rates and more choices, NAMIC said.
“The goal of insurance underwriting is to correlate rates for insurance policies as closely as possible with the actual cost of claims,” NAMIC said. “Effective underwriting allows insurers to operate profitably and compete in the marketplace. Likewise, appropriate underwriting ensures that consumers benefit by not subsidizing other policyholders who pose worse insurance risks, resulting in inappropriate cross-subsidization.”
In response to concerns that insurers’ use of credit-based insurance scoring unfairly discriminates against certain population groups, NAMIC pointed out that every empirical study has concluded that insurance scoring is neutral on its face with respect to race, ethnicity and income, and is applied neutrally. The use of insurance scoring is not motivated by a desire to discriminate based on race, ethnicity or income, nor do insurers collect or use this information.
“As a result, it is inappropriate to ban a fair and effective underwriting tool that benefits the majority of insurance consumers. Congress should acknowledge and respect the actions of the states in effectively regulating the business of insurance, including the use of credit-based insurance scores,” NAMIC said.
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