Although the use of credit scores as an underwriting tool for auto and homeowners insurance is now an established practice, consumer groups, legislators and regulators still have not had their final say on the matter.Indeed, state lawmakers across the nation can look forward in 2003 to consideration of numerous measures to curb the practice-and in some cases outright ban it.

"My view is that there is less and less acceptance of it," says Birny Birnbaum, a consumer activist and founder of the Center for Economic Justice. "At first, the insurance industry was saying it was just like any other rating factor and that you don't need to do anything. And then they said we have to do a much better job of educating the public."

Insurance leaders, including Sam Sorich, vice president of the Des Plaines, Ill.-based National Association of Independent Insurers, say the industry has made a number of compromises over the past year in its use of the practice in an effort to quell public concerns about how their personal credit affects their ability to obtain insurance and what price they must pay for it.

Industry compromises

But Birnbaum sees the compromises as grudging that does nothing to dispel the inherent unfairness of the practice. "It is a slow process of tearing down the uses and abuses of credit scoring," Birnbaum says. "At some point it will become clear to legislators and regulators that it is an unfair process."

The industry, on the other hand, has witnessed stirrings among individual states, but little concrete action. Lynn Knauf, policy analyst for the Alliance of American Insurers, Downers Grove, Ill., says the fact that only one state has come close to banning it bodes well for the industry.

"The issue has come up in more than 30 states. And when all is said and done, there were nine bills that were passed and several regulations. Yet only one state, Maryland, has come close to banning it," Knauf says.

And she expects similar legislative action next year, even in states that took some action in the past legislative session. "In many states, we know insurance commissioners will be coming back for more regulations," she adds.

Both the Kansas City, Mo.-based National Association of Insurance Commissioners (NAIC) and the National Conference of Insurance Legislators (NCOIL), Albany, N.Y., have taken up the issue this year, hoping to provide guidance for states looking at the matter.

Legislative options

While the NAIC started out the year exploring the possibility of developing a model law, the regulators seemed to have settled on publishing a series of options, along with the pros and cons of each, for the states to look at in deciding how they should regulate the practice.

In addition, the NAIC will publish a consumer brochure on the topic.

The Washington, D.C.-based American Academy of Actuaries, under the aegis of the NAIC, will look at the hot-button issue on whether or not credit scoring has an unfair impact on minority or low-income consumers. But the complexities of such an undertaking will preclude any answers in the immediate future.

At its annual meeting set for the end of November, NCOIL, on the other hand, was expected to approve a model law that has grown less industry friendly over the past several weeks.

In Illinois, Rep. Timothy Osmond (R-Antioch) has introduced measures in the model law that would restrict the use of credit history by insurers in a number of instances. He plans on introducing the same measures into the bill that the Illinois Legislature passed last year. But in the end, insurers will still retain the right to use credit history in underwriting.

The most common restriction prohibits the use of credit scores as a sole underwriting criteria-a provision the industry seems willing to live with and indeed insists it follows already as common practice.

The use of credit scoring as an underwriting tool has really taken off in the past three years with one company, San Rafael, Calif.-based Fair, Isaac & Co., providing the model for many of the companies that use credit-scoring technology.

Just how these models take a credit history and translate it into a person's "insurance score" has been an area of concern as the companies have been reluctant to disclose their processes to regulators.

The uncertainty surrounding how credit scoring models work is compounded by insurers' reluctance to explain to policyholders why credit habits are linked to the likelihood of incurring auto and homeowners insurance losses.

Eddie Lo, Fair, Isaac's insurance manager, admits there is no formal study linking the two behaviors. Nevertheless, he believes ample social research exists that shows people willing to take risks in one area of their lives will take it in others.

"That person's intention is to test out the system to seek a certain kind of return. It will show in how you manage your finances, how you drive, and that they are related," he says.

Steve Tuckey is the New York editor for Insurance Chronicle, a Thomson Financial Insurance Solutions publication.

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