Recently, the House Financial Services Oversight and Investigation Subcommittee held a hearing where speakers from various insurance industry and consumer protection groups gave testimony regarding “The Impact of Credit-Based Insurance Scoring on the Availability and Affordability of Insurance.” The issue of using credit scores as an indicator of risk in rating personal lines insurance has become a hot topic amid fears from lawmakers and consumer advocates that such a metric may serve as a proxy for race, leading insurers to unfairly discriminate against minority groups in premium pricing.
Florida Insurance Commissioner Kevin McCarty spoke on behalf of the National Association of Insurance Commissioners (“NAIC”). His testimony was very critical of the use of credit scores in insurance stating that just because they show a mathematical correlation with claims does not necessarily make them fair and valid criteria for insurance purposes. According to Commissioner McCarty, the available data demonstrates a strong correlation between credit scoring and race/ethnicity that are statistically significant. In addition, he pointed to the fact that credit reports are error prone, susceptible to manipulation through identity theft, and have disproportionately negative affects on recent divorcees, recently naturalized citizens, the elderly, the disabled and younger individuals who have not established credit histories. However, Commissioner McCarty stated that the official position of the NAIC is that further study of the issue is necessary.
North Dakota State Representative George Keiser testified on behalf of the National Conference of Insurance Legislatures (“NCOIL”) and took the position that credit scoring, within certain parameters, is beneficial to the consumer and results in lower prices for the majority of consumers. Representative Keiser spoke at length about the NCOIL Model Act Regarding Use of Credit Information in Personal Insurance (the “Model Act”), which is now used in 26 states including Florida, New York, and Texas. The Model Act, amongst others things: (1) prohibits an insurer from denying, canceling, or non-renewing coverage due only to credit history; (2) prohibits an insurer from basing renewal rates solely on credit history; (3) proscribes that an insurer must use a credit report that was issued or an insurance score that was calculated within 90 days from the time that a policy is written or renewed; (4) allows an insurer to give a so-called “pass” to persons impacted by extraordinary life events such as divorce, illness, or death of a spouse; and (5) requires that a company file its insurance scoring models with the state insurance department, which would consider them trade secret.
The Federal Trade Commission's (“FTC”) report titled “Credit-Based Insurance Scores: Impacts on Consumers of Automobile Insurance” (the “Report”) released last year concluded that credit scores can effectively predict the frequency of claims made to a personal lines auto insurance company. The Report said that there is a “relatively small” chance of the scores being used as a direct substitute for race or ethnicity in premium pricing. As a follow-up to the Report, the FTC announced on May 20, 2008 that it would perform a study on the use of credit scoring for homeowner’s insurance using information from the nine largest homeowner's insurance companies in the United States gathered via compulsory orders. A completion date for the follow-up report has not yet been announced.
Two bills have been introduced into the House of Representatives to curtail or outright ban the use of credit scores in the pricing of insurance.
H.R. 5633, the Non-Discriminatory Use of Consumer Reports and Consumer Information Act of 2008, which is still in committee, would amend the Fair Credit Reporting Act (“FCRA”) and effectively stop insurers from using credit information in rating and underwriting decisions. If passed into law, this legislation will have a substantial effect on insurance pricing, as the use of such consumer information has become common place in the personal lines property and casualty insurance industry. Specifically, the proposed legislation will “prohibit a consumer reporting agency from furnishing to any person, and any person from using or obtaining, a consumer report or consumer information for use in making any decision to underwrite or rate any personal lines of insurance for which the … FTC determines that such use: (1) results in racial or ethnic discrimination; or (2) represents a proxy or proxy effect for race or ethnicity.” Excluded from such proscription are property loss data, driver history, and medical history - to the extent such access and use is consistent with the FCRA.
An alternative measure, H.R. 6062, the Personal Lines of Insurance Fairness Act of 2008 , removes insurance lines altogether from the FCRA, thus prohibiting any consumer reports or score from being used in the rating of personal lines insurance, regardless of whether or not they are found to be discriminatory.
According to Commissioner McCarty’s written testimony, forty-eight states have made some form of legislative or regulatory limitation on the use of credit scoring in the pricing of insurance products. Furthermore, a handful of states, such as Hawaii (personal auto), Maryland (homeowners) Massachusetts (personal auto) and Michigan (personal auto), have an outright bar on the use of credit-scores in insurance rating for certain lines of insurance.