The insurance industry is taking aim at a survey sponsored by the Washington Office of the Insurance Commissioner which raises the issue of whether credit scoring can adversely impact the ability of low-income and minority consumers to obtain affordable insurance.The latest controversy over the use of credit scoring comes as the industry braces for another round of legislative efforts to either curb the practice or ban it altogether. As many as 40 states are expected to tackle the issue this year, industry groups say.

While the survey does not come to any conclusions, it leaves the door open wide enough to concern carriers.

Washington Commissioner Mike Kreidler, who also co-chairs the Kansas City, Mo-based National Association of Insurance Commissioners' working group assigned to review credit scoring, says the purpose of the credit scoring survey was not to single out particular companies, but rather to determine if the practice results in discrimination against the poor.

State lawmakers across the country have grappled with regulatory and legislative oversight of the practice, which has become widespread in the past decade.

Most of the state laws focus on how much premium can be affected by credit scores as well as how much weight should be to given a person's credit history when rating and pricing policies.

Study Results

In the Washington study, about 3,000 randomly chosen policyholders from three insurers were asked questions about ethnicity, marital status and income.

"The age factor produced the most conclusive results," Kreidler says. "In almost every analysis, older drivers have, on average, higher credit scores, lower credit-based rate assignments, and less likelihood of lacking a valid credit score."

Diana Lee, senior research consultant for the Des Plaines, Ill.-based National Association of Independent Insurers, questioned the methodology of the study.

"The report only examined three companies," Lee says. "With the small sample of companies studied, and the variation in how insurance scoring is used among insurers, the report has very little basis for projecting its conclusion across the wide spectrum of policyholders and insurers doing business in the state."

Neil Alldredge, state relations manager for the National Association of Mutual Insurance Companies, Indianapolis, notes that the study goes to great lengths to emphasize its limitations. "The study should not be viewed as any kind of indictment of insurance scoring," he says.

NAIC's Involvement

Meanwhile, the NAIC working group assigned to credit scoring approved a series of regulatory options along with a consumer brochure to help lawmakers and consumers make sense of the issue.

However, the NAIC panel has yet to decide on whether or not to approve a full-fledged study of the issues discussed in the Washington study. At the last meeting of the working group, the panelists urged more study.

Oregon Insurance Commissioner Joel Ario, who co-chairs the working group with Kreidler, says the Washington study raises questions about whether such disparate impact exists. However, the group did not address whether a more extensive study is necessary.

On the state level, Indiana has emerged as a battleground. During the first three weeks of the 2003, Indiana lawmakers introduced five bills that would limit the use of credit scoring.

The primary bill is loosely based on a model developed by the National Conference of Insurance Legislators, Albany, N.Y.

The biggest difference with the proposed legislation is the requirement for insurance companies to provide "at least" four reasons for an adverse action rather than the "up to four" as called for in the NCOIL model.

"Complying with the reporting provision would be extremely difficult because insurers only receive computer-generated insurance scores, not detailed information about private factors in a person's credit history," says Robert Hurns, NAII counsel.

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

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