As we have previously reported here, here and here, the use of credit scores by insurers is a controversial topic. This post summarizes recent attempts and proposals to limit or eliminate the use of consumer credit scores by insurers as an underwriting tool for setting premium rates for around the United States.
The Attorney General of Connecticut, Richard Blumenthal, gave formal testimony to the state legislature on February 17, 2009, calling for the legislation to bar insurers from using credit history for the purposes of determining whether to provide coverage to a particular applicant or to cancel or non-renew an insurance policy. Attorney General Blumenthal advocated for An Act Concerning Automobile Insurance, H.B. No. 6444, which would also reduce the impact of residential location or territorial criteria on insurance rates.
Attorney General Blumenthal emphasized that determining whether an individual is a good insurance risk based on their credit history, in a time when credit availability has been severely restricted, punishes people for losing their jobs and their homes and compounds the problems of the current economic downturn. Rather, according to Attorney General Blumenthal, individuals should be judged on criteria related to their driving history.
Opponents cite the Federal Trade Commission’s 2007 report on credit-based insurance scores, last discussed on InsureReinsure.com here, which called them “effective predictors of risk.” That is, they are predictive of the frequency and severity of claims consumers would file. According to American Insurance Association (“AIA”) and the Property Casualty Association of America (“PCI”), many consumers pay lower premiums because of credit scoring, and prohibiting it would result in rate increases for the majority of Connecticut consumers and do away with the fundamental fairness of risk-based pricing.
Regarding territorial criteria, the proposed legislation reduces the weight provided to the residency of the driver over a ten-year period when determining personal automobile premiums. H.B. No. 6444 also requires insurers to provide notice to lienholders when an automobile insurance policy is cancelled and requires that valid registration and proof of insurance be presented before an impounded vehicle can be released.
To see the Attorney General’s full press release, click here. To see a full version of the H.B. Bill No. 6444, click here. To see the AIA’s full press release, click here. To see PCI’s full press release, click here.
A similar, but much more abbreviated bill has been proposed titled An Act Prohibiting the Use of Credit Ratings to Set Automobile Liability Insurance Policy Premiums, H.B. No. 5431. To see the full text of H.B. No. 5431, click here.
On February 18, 2009, the Florida Office of Insurance Regulation held a hearing to determine what the insurance industry is doing to prevent the use of consumer credit scores from adversely affecting racial minorities and low income groups. Representatives from five large property and casualty insurers answered questions concerning the impact of the use of credit information. The industry representatives also answered questions concerning the findings in the Federal Trade Commission’s 2007 report, mentioned above, that concluded that African-Americans and certain Hispanics are overrepresented in the lower tier and underrepresented in the upper tier of insurance scores and how credit scoring may have led to this result. Industry media sources report that those being questioned stated that credit scores are not inherently racial and that the Federal Trade Commission’s 2007 report does not support that conclusion as there are other rating factors that are not equally distributed among racial groups as well. Also, those being questioned stated that personal insurance rates would inevitably increase on whole if credit scoring were not allowed.
On February 8, 2009, the North Dakota state Senate recently turned down a bill that would have outright banned insurers from using credit history in underwriting and rating by an almost 2-to-1 margin. The proposed legislation, Senate Bill No. 2330, applied to the denial, cancellation and non-renewal of a personal insurance policy in whole or in part on the basis of consumer credit information.
To see the full text of Senate Bill No. 2330, click here.
The Oregon state legislature is considering a bill that would make it illegal for a personal lines insurer to cancel or non-renew a policy after evaluating the policyholder’s individual credit history as part of a request for a re-rating by a policyholder. The proposed bill, Senate Bill 377, would also prevent the insurer from increasing the policyholder’s premiums based on such a re-rating. Senate Bill 377, in its current form, only applies to policies in effect for more than 60 days and does not apply to the initial underwriting of the policy where insurers would still be allowed to base underwriting decisions on an applicant’s credit history in combination with other substantive underwriting factors. The perceived benefit of this bill would allow a policyholder with an improving credit score to receive lower premium rates from an insurer who uses credit history as an underwriting factor. Senate Bill 377 limits such a re-rating request to once per year.
To see a full version of the Senate Bill 377,click here.
We will continue to provide updates on changes and proposed changes in state laws and regulations concerning the use of credit scoring by insurers.