Credit Scoring Debated At NAIC MeetingInsurance regulators reviewing the use of credit scores in theunderwriting and rating process continue to face conflictingopinions from industry groups and consumer advocates.

Currently, the National Association of Insurance CommissionersCredit Scoring Working Group is mulling an independent study to beconducted or coordinated by the association. The study, if it wereto be undertaken, would focus on credit scoring issues, includingwhether the insurer use of credit scores may have a “disparateimpact” on certain minority and low-income groups.

“I think the study should be done, but we want to first developperimeters of the study–identify the questions we want answers to,”Mike Kreidler, co-chair of the market regulation and consumeraffairs committee for the credit scoring working group, toldNational Underwriter.

His comments came during his committee meeting on Sunday, March9, at the NAICs spring meeting in Atlanta.

Mr. Kreidler explained that his committee is charged withdeveloping guidance regarding minimum data elements should the NAICdecide to lend its backing to a study. And it is the judgment ofthe committee, he added, that if such a study is undertaken, itshould determine whether rating plans using credit historysystematically produce different results for blacks, Hispanics andwhite non-Hispanics, and whether there are variations of results byage and income.

“One of the challenges is that it will take considerableresources to undertake a study of this magnitude,” said Mr.Kreidler, who is also insurance commissioner of Washington, whichbecame the first state to pass a bill limiting insurers use ofcredit scores last year.

Separately, one of the new findings brought to the regulatorsattention at the committee meeting was a study by the University ofTexas, whose results indicate a strong correlation between creditscores and the risk of loss, according to American InsuranceAssociation.

“On March 6, the University of Texas released a study called AStatistical Analysis of the Relationship Between Credit History andInsurance Losses. The study is by far the largest, mostcomprehensive state insurance study that has been completed overthe past year,” said David Snyder, assistant general counsel forthe Washington, D.C.-based AIA.

The study matched policyholder loss records for more than153,000 auto insurance policies with credit scores for the namedinsured driver, Mr. Snyder said. He said that five leading autoinsurers supplied loss data and driver information, whileChoicepoint, an Alpharetta, Ga.-based risk management informationprovider, matched named policyholders with a credit score.

In general, lower credit scores were associated with higher lossexperience, indicating that credit scores are a useful tool inhelping to predict future loss experience, he said.

The study also found that credit scoring fine-tunes the accuracyof auto insurance underwriting and ratings in regard to predictingfuture loss experience of individual policyholders, when comparedto the use of traditional variables alone, Mr. Snyder added.

The report doesnt examine, however, the potential impact thatthe credit scoring may have in premiums for specific groups ofpeople based on race or income.

But even if the insurer use of credit information in theunderwriting or rating process, sometimes known as “insurancescoring,” inadvertently affects one ethnic or income group morethan another, “that would be irrelevant. It would not violate legalstandards,” said Mr. Snyder.

“The legal test is whether intentional discrimination isoccurring, and there is no evidence that insurers have any ideaabout the race and income of their policyholders. Race, ethnicityand income are personal characteristics prohibited as underwritingor rating factors, and property-casualty insurers do not gather ormaintain such information on their policyholders,” Mr. Snydernoted.

He also observed that in Maryland, where there is now a near-banon the use of credit information in underwriting and ratingpersonal insurance, some insurers have responded by raising ratesacross the board or eliminating the lowest-price tier.

“We argued strenuously a year ago that the restrictions oninsurer use of credit information debated by the Marylandlegislature constituted bad public policy that could have anegative impact on consumers. As other states consider legislationand regulations of their own, we urge them to reflect on thereal-world effects the Maryland laws are having on consumers,” saidMr. Snyder.

He argued that the insurer use of credit information hasbenefited consumers around the country by bringing more companiesinto the marketplace and allowing insurers to price policies moreaccurately.

The most significant finding about credit scoring legislation isthat it impacts the market in a very negative way, Mr. Snyder toldNational Underwriter. “These negative effects artificiallycreate a hard market, and it is the consumers who ultimately paythe price with a smaller choice of companies and unjustified,higher rates for good risks.”

But consumer advocate Birny Birnbaum, consulting economist forthe Center for Economic Justice in Austin, Texas, told regulatorsthat credit scoring is unlike any other factor.

Mr. Birnbaum noted that according to the insurance industry, theonly issue worth examining is whether there is a correlationbetween insurance scoring and the risk of loss, and whether the useof credit scoring complies with current rating laws.

But whats missing in all this, he contends, is a public-policydebate.

“I have personally testified before state legislatures andinsurance commissioners in many states, and the issue of whethercredit scoring has a disproportionate impact on poor consumers, onseniors, on immigrants, and on other classes or consumers hasarisen in each state,” he said.

Representatives of the insurance industry, including theNational Association of Independent Insurers and the AmericanInsurance Association, have testified that credit scores do notvary by income or race, he noted.

“In a report prepared for the Ohio Civil Rights Commission inJanuary, I concluded that insurance credit scoring very likely hasa disproportionate impact by race and income,” Mr. Birnbaumsaid.

Reproduced from National Underwriter Edition, March 17, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.