13 States Ask Insurers' Credit Score Data

By Daniel Hays, NU Online News Service, April 29, 2004 - A multi-jurisdiction study on insurers' controversial use of customer credit background to assess risk kicked off today with 13 states asking carriers for data on the issue.
 
Meanwhile efforts to secure a ban on credit scoring that were announced Monday by Michigan's governor, and in January by the Missouri governor, appeared unlikely to overcome legal and legislative roadblocks.
 
The multi-state study of the issue will examine the impact of credit scoring on minority areas, the actuarial soundness of the process and its affect on premium prices, said Randy McConnell, a spokesman for the Missouri Insurance Department, which is heading the study.
 
Planning for the ad hoc study effort began this January following the National Association of Insurance Commissioners decision last September to drop a proposal for an NAIC-sponsored study after fierce opposition from insurers.
 
Mr. McConnell said the states involved are Alabama, Indiana, Kansas, Louisiana, Maryland, Michigan, Missouri, Montana, Nevada, Oregon, Washington, West Virginia and Wisconsin.
 
The study is also getting assistance in the design process from California, which does not approve its use.
 
Mr. McConnell said it is also possible that the study will involve a collaborative effort with federal authorities who were mandated by Congress as part of the Fair Credit Reporting Act to make a study of the scoring process impact on credit availability. He said talks with federal officials have been held.
 
The federal effort involves the Federal Trade Commission and Federal Reserve Board, in consultation with the Fair Housing Administration of the Department of Housing and Urban Development,
 
Missouri Gov. Bob Holden in January had called for a legislative ban of credit scoring after the Missouri Insurance Department Director Scott Lakin released a study that found credit scoring hurt low income and minority policyholders in Missouri by rating them lower than people in wealthy ZIP code locations.
 
Insurers called the study flawed because they said it focused on impacts without assessing the accuracy and objectivity of the process.
 
Bills to create the ban were introduced at the behest of the Democratic governor in the Republican-controlled Senate and Assembly and neither managed to progress from committee. Mr. McConnell said at this point their chance of passage is “slim to nil.”
 
In Michigan, Democratic Gov. Jennifer M. Granholm and Office of Financial and Insurance Services Commissioner Linda A. Watters called for a rule to ban credit scoring to determine rates for home and auto insurance. Ms. Watters said there was no uniform industry-wide standard scoring mathematical model and that credit reports were “fraught with errors.”
 
A spokesperson for the governor said the rule route was chosen because a Republican-controlled State House was “not interested” in such legislation. She said the comment and hearing process for a rule could take four to six months.
 
Ken Ross, chief of staff for Ms. Watters said they were very optimistic because Senate Majority Leader Ken Sikkema, R-Wyoming, had expressed support for a ban. However, Mr. Sikkema's press aide, Bill Nowling, said that was only the senator's “personal position,” not the Republican caucus.
 
Mr. Nowling said if the measure passed the “arduous rulemaking process”  he is “confident someone will challenge that rule” in court--most likely and aggrieved insurance company.
 
The Washington-based American Insurance Association denounced the rule proposal as “misguided” and said the way to improve rates is to foster competition.