Late last month, the National Association of Insurance Commissioners (the “NAIC”) held a public hearing regarding the use of credit-based insurance scores by insurers. The hearing served as a fact-finding session where opposing viewpoints were heard and discussed. The topics covered included: (1) what constitutes a credit-based insurance score; (2) an explanation of how insurers use credit-based insurance scores; and (3) how the current economic conditions are affecting policyholder premiums related to credit-based insurance scores. In attendance were representatives from the insurance industry, consumer advocacy groups, consumer credit rating agencies, and state regulators. Several of the attendees submitted written testimony answering these three questions to supplement their oral testimony during panel discussions. To see the written testimony in its entirety, click here. To see the attachments to the submitted testimony and the supplemental written testimony, click here and here.

Proponents and detractors argued their positions regarding the correlation between credit-based insurance scores and expected losses and whether using credit-based insurance scores for segmenting risks into different groups with different expected cost levels is fair and equitable or discriminatory and a proxy for race.

Also discussed was the impact the economic downturn has had on credit-based insurance scores and whether that effect, if any, will cause a change in policyholder premiums. According to Robert P. Hartwig of the Insurance Information Institute, “The silver-lining in the current financial crisis is a change in the credit profile of the average American household whereby outstanding debt is reduced to more manageable levels. This should lead to an improvement in the health of the typical consumer’s (and family’s) balance sheet . . . . This also implies that credit scores (and credit-based insurance scores), contrary to popular belief, are not headed uniformly downwards despite the current recession. Likewise, credit scores do not head uniformly upwards during boom times.”

We will continue to follow this issue and provide further updates on