With a legal challenge mounting from industry trade groups, several states that were planning to conduct a multi-state study of credit-based insurance scores have suspended that effort.Instead, the National Association of Insurance Commissioners (NAIC) will appoint a five-member panel to work with the Federal Trade Commission (FTC) and the Federal Reserve Board on their federally mandated research into the underwriting practice.

The Property Casualty Insurers Association of America (PCI) and the National Association of Mutual Insurance Companies (NAMIC) in June expressed legal concerns about the multi-state study and asked the states involved to withdraw their data requests from insurance companies.

Nat Shapo, the Chicago-based attorney for PCI and NAMIC, sent a letter to insurance commissioners in Oregon, Alabama, Washington, Nevada, Montana, Indiana and Missouri expressing PCI's and NAMIC's two primary concerns with the states' planned study:

  • The states would be using their regulatory examination powers for public policy research, which could be used as a basis for establishing new laws. Instead, the states should be using their regulatory powers to verify compliance with existing insurance laws.
  • By focusing on the possible "disparate impact" of credit scoring on low-income and minority populations, the state study could possibly violate anti-discrimination provisions of existing insurance laws.

"The (states') letter accompanying their recent data call makes it clear that the primary purpose of the study is not to verify compliance with existing law," says Shapo. Furthermore, he adds, "If disparate impact were shown-and we don't have reason to believe it would be-we don't believe disparate impact is relevant under state unfair discrimination laws."
Made more sense

Last year, the Missouri Department of Insurance conducted its own research and found that credit-based insurance scores do have a "disparate impact" on low-income and minority populations in that state. Other industry studies have not found that relationship.

The Missouri study, which PCI criticized for poor methodology, was based on aggregate data by ZIP code. The suspended multi-state study would have analyzed individual policyholder data for a relationship between loss and credit scoring, as well as the effects of scoring on premiums.

But it had become obvious the states were going to face legal barriers to getting the data they needed from insurance companies, says Randy McConnell, communications director for the Missouri Department of Insurance, which was coordinating the multi-state research.

"We had always feared litigation and it was becoming more of a real prospect every day," he says.

As the August 20 deadline for insurers to submit data approached, "it made a lot more sense to route that work through the FTC and get a report on the street that policymakers can use to address any concerns about consumer impact-rather than have this (state) project tied up in court for the next three years," he adds.

The FTC/Federal Reserve study, which is mandated by the Fair and Accurate Credit Transactions Act (FACT), is due at the end of next year.

At press time, the NAIC was assembling its panel of five to work with the FTC on the research. "The panel will have access to the data that results from the FTC study," says Roger Hoadley, communications director at the NAIC. But if the state regulators' questions about credit scoring are not answered by the federal study, the states reserve the right to resurrect their own study, he says.

The multi-state study would have answered three primary questions, says Missouri's McConnell. Does credit scoring have a disproportionate negative impact on low-income and minority populations? What is the dollar impact of credit scoring on premiums? And is the practice of using credit scores to calculate insurance risk actuarially sound?

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