Calif. Homeowners Emergency Regulation Adopted
July 28, 2003

The California Office of Administrative Law (OAL) last week approved the insurance department's emergency regulation on homeowners insurance underwriting and rating. The regulation restricts insurers' consideration of past losses.

The Association of California Insurance Companies (ACIC) sought a "stay" on the regulation's implementation, but on July 23, the Sacramento Superior Court denied ACIC's request. Thus, the regulation is now in effect.

The ACIC believes no emergency exists to justify the adoption of the
regulation, nor does it believe the department has the statutory authority to impose such restrictions on homeowners insurance underwriting and rating.

The ruling stems from an advisory notice the Department of Insurance issued on April 24, 2003, regarding the use of loss information as an eligibility guideline for homeowners insurance. The ACIC was part of a joint lawsuit from the industry challenging the validity of the advisory notice.

On June 12, the Sacramento Superior Court issued an order that prevents the insurance department from enforcing the advisory notice. On July 10, the insurance department asked the OAL for permission to adopt an emergency regulation that is similar to the advisory notice.


URL: www.insurancejournal.com/news/newswire/west/2003/07/28/30984.htm
 

Calif. Commissioner Warns Ins. Cos. About Use of Databases, Credit Scoring
July 25, 2003
By Cynthia Beisiegel

California Insurance Commissioner John Garamendi delivered a powerful message to the attendees of the Association of California Insurance Companies' Annual General Counsel Seminar in Las Vegas July 24.

"I'm laying down the gauntlet," Garamendi said, speaking to the attendees about the use of credit scoring and historic databases such as C.L.U.E. and A-Plus. He warned insurers against the use of both tools for underwriting and rating, citing them as discriminatory and inaccurate.

"I came here specifically to deliver a message," Garamendi continued. "Challenge me in court, but I will not back down." He urged insurance companies to look towards the future to find ways to be fair to consumers when underwriting and rating policies.

Historic databases, he said, can be a helpful and powerful tool, but must be used with discretion. It's not the only way to underwrite, he said, and noted that the databases are blind and often wrong.

Garamendi cited an example of woman who had her purse stolen in Montreal, Quebec, and was later denied homeowners insurance in California because of the incident. "To harm a consumer using an incorrect database is not going to happen in California," he said.

"I'm not going to back down on this matter," he continued. "If [insurance companies] are going to use historic databases that will adversely affect consumers, they must inform consumers."

Credit scoring, Garamendi said, is a very powerful, insidious, and wrong tool to be using. "For those companies who want to use it, you will have a long fight ahead of you," he said. "I will do everything I can to prevent discrimination."

"If we are going to be successful as a state, the insurance market must be open to everybody," Garamendi added.

Garamendi touched briefly on the situation with State Compensation Insurance Fund, noting that the company has grown to become the largest property/casualty insurer in California and the largest workers' compensation insurer in America. "For them to think that they cannot be regulated, we'll be discussing that in court," he said.

Garamendi said that the workers' comp system simply has to change – it is not an option. He resolved to work towards a simpler system, one that is less contentious and provides more aid for injured workers.

Garamendi also resolved to continue his fight against fraud, stating that fraud costs have increased about $19 billion dollars this year, totaling $29 billion.

While he noted that the problems in California's insurance marketplace "seem to be numerous, none of them are insurmountable." He said that California will move to resolve the crisis. "It's our nature."

Garamendi's keynote speech opened the session, where attendees learned the latest in national trends in legislation and regulation, appellate case review, privacy, punitive damages and more. The seminar continues through July 25 at the Bellagio Hotel in Las Vegas.

Editor's note: Listen to the exclusive audio interview with Commissioner Garamendi premiering Monday, July 28, on Insurance Journal Online.

URL: www.insurancejournal.com/news/exclusive/west/2003/07/25/30968.htm
 

691 Fails in Calif. Assembly Ins. Committee, ACIC Pleased
July 10, 2003

California Senate Bill 691 failed to pass the state Assembly Insurance Committee July 9, legislation that would have banned the use of credit-based insurance scores for underwriting and rating homeowners insurance. Insurers can continue to rely on insurance scores-a valid tool that boosts consumers' chances for coverage and lower premiums, according to the Association of California Insurance Companies.

"We are pleased that members of the Assembly Insurance Committee recognized that SB 691 is the wrong response to current market conditions in California," said ACIC president Sam Sorich. "Insurance scores help most consumers get better rates because most people have good credit. Without the ability to use credit-based insurance scores, most policyholders would pay more for insurance."

The ability of insurers to use this highly accurate, predictive tool must be preserved, Sorich said. Banning the use of credit would harm consumers throughout the state, said Sorich, a lead witness at the committee hearing. It would take away the ability of insurance companies to identify responsible customers who should be rewarded with lower premiums. Instead, those responsible customers would have to pay higher premiums to subsidize those who are more likely to incur a loss. Combining insurance scores with other familiar factors, such as the age of a home and the number of claims filed, helps insurers gain a clearer picture of an individual's risk and fairly price policies for each consumer, Sorich said.

SB 691 would have prohibited insurance companies from using the credit history or the credit-based insurance score of a consumer who is applying for or renewing a homeowners insurance policy, a proposal that the Coalition for California Homeowners, of which ACIC is a member, believed was too radical. The coalition is an alliance of organizations-including minority business groups, neighborhood associations, construction, mortgage banker groups and individual insurance companies- dedicated to enacting sound public policy on the use of insurance scores.

An alternative, reasonable and balanced approach would better serve consumers and the insurance market, Sorich said. Alternative legislation proposed by the Coalition for California Homeowners would require the disclosure and notification and notification of when insurers will use credit, prohibits insurers from using credit information as the sole factor for underwriting and rating decisions, and prevents insurance scores from considering gender, address, ethnic group, religion, and marital status, among other factors.

According to a study released Tuesday by the California Chamber of Commerce, restrictive bills like SB 691 could drastically reduce the availability of homeowner's insurance and have a devastating impact on California's residential housing market and overall economy. The study, authored by the Rosen Consulting Group, found that a 10 percent reduction in homeowner policy availability would directly lead to a $6.1 billion decline in the state's annual gross product, a drop of $517 million in indirect business taxes, and a loss of 10,000 jobs. The total impact would be an overall decline of $9 billion in annual gross state product-equivalent to the decline in gross state product experienced during the 1992 recession- and 49,600 job losses.

URL: http://www.insurancejournal.com/news/newswire/west/2003/07/10/30517.htm

Allstate backs off credit history use
Sacramento Bee
By Bob Walter -- Bee Staff Writer
May 20, 2003

Allstate Insurance Co. has agreed to stop -- at least temporarily -- using credit history to decide who gets homeowners insurance in California and how much it will cost, state Insurance Commissioner John Garamendi announced Monday.

But an Allstate spokesman said the agreement does not mean the company is content to permanently abandon the use of credit scoring, which is alternately described as discriminatory toward minorities, women and the poor or as a neutral and vital tool for insurers.

"We are looking to take the debate to the Legislature," said Robert W. Daniels, Allstate corporate relations manager.

Garamendi said the agreement with Allstate was an important step toward eliminating credit scoring for homeowners insurance. California already outlaws it for automobile policies.

The next step, he said, should be legislative approval of a bill by state Sen. Martha Escutia, D-Norwalk, that would ban the practice. The bill, which was approved last week in the Senate, is moving to the Assembly Insurance Committee, an Escutia aide said Monday.

The elimination of credit scoring is one element of Garamendi's Homeowners Bill of Rights, which will combine regulation and pending legislation to protect homeowners.

Along with credit scoring, the package will deal with such issues as the use of controversial national databases that compile information about homes and individuals; title insurance; and mortgage guarantee insurance, also known as PMI, frequently required by lenders.

With about 14 percent of California's homeowners insurance market, Allstate is the biggest company in the state that has been using credit scoring as an underwriting tool.

State Farm, which has almost 23 percent of the market, has stopped writing new homeowners policies in California. And Farmers Insurance, with 17 percent, does not use credit scoring in California.

Garamendi said "very few" other companies writing homeowners insurance in California have acknowledged the use of credit scoring.

Allstate's Daniels said the company has been using credit scoring in California and other states for many years. He hopes the end of its use in California is strictly temporary.

"It's a great statistical tool," he said. "We don't capture age, income or ethnicity ... from our perspective; it is nondiscriminatory."

That's also the view of the American Insurance Association, which criticized Garamendi's push to ban the use of credit scoring.

AIA lobbyist Bill Gausewitz said credit scoring helps insurers predict future losses and price policies fairly.

"Considering the tightening of California's homeowners insurance market, now is not the time to approve legislation that will create more obstacles for insurers to operate effectively," Gausewitz said.

Garamendi said, however, that Allstate's agreement to stop the practice sends a message to the rest of the industry.

"The insurance industry has been arguing across the country that they can't possibly exist without credit scoring as a tool," he said. "This agreement makes it clear that they can."
 

A.M. Best
Insurance-Scoring Bill Passes California Senate

SACRAMENTO, Calif. 05/16/2003 (BestWire)-California's state Senate has approved a bill barring the use of credit-based insurance scoring as a consideration when writing homeowners policies.

Sponsored by state Sen. Martha Escutia, a Democrat, the bill would carry over provisions from the voter-approved Proposition 103, which already denies insurers the right to consider a potential policyholder's credit history when issuing personal automobile insurance.

The bill passed the Senate by a 23-14 vote and now goes to the state Assembly for consideration.

Robert Perez, a spokesman for Escutia's office, said the senator was inspired to sponsor the bill after learning that her grandparents had been denied homeowners insurance on the basis of their credit history.

"We believe there's no correlation at all between an insurance policy, which is determined by things like the age of the house, the zoning, the construction, the fire risks and so forth, and what someone's credit is like, which should be completely irrelevant," Perez said.

"Because poor people and especially minorities do not have the same kinds spending patterns" and might not have a credit history, "this can be used in a discriminatory way, and that's what the worry is," he added.

In the past two years, numerous states, including Maryland, Washington, Ohio, Texas, Minnesota and Missouri, have passed restrictions on the use of credit-history factors in insurance-scoring reports.

Escutia's bill bars the use of such information "in whole or in part." If passed, the bill would make California the first state to bar the use of credit-history information in both auto and homeowners policies.

Nicole Mahrt, a spokeswoman for the American Insurance Association, said the AIA opposes the bill and is trying to work Escutia's office on alternatives to the legislation.

"We think credit scoring is a perfectly appropriate tool available to insurers to try to help them assess risks, and it remains the biggest challenge to the industry that we be able to find continue to find and use better and more accurate ways to predict our costs," Mahrt said, citing a University of Texas study that linked poor credit histories with poor underwriting risks.

"At a time when it is very difficult to get companies to write homeowners insurance in California, the last thing we need is legislation that will make it less attractive to business in the state," Mahrt added. "We need to make it easier."

Norman Williams, a spokesman for the state Department of Insurance, disagreed.

"Credit-scoring creates the potential for discrimination against members of protected classes, and it's not clear what benefit it offers to offset that," Williams said. "The department and the commissioner support the bill completely."

(By R.J. Lehmann, associate editor: raymond.lehmann@ambest.com)

Insurance limit advances
MEASURE BANS HOME POLICY BASED ON CREDIT HISTORY
By Michael Bazeley
Mercury News (San Jose/Silicon Valley)

The state Senate passed a bill Thursday that would bar insurance companies
from considering a person's credit history when writing homeowners policies.

The bill, by state Sen. Martha Escutia, D-Norwalk, passed on a 23-14 vote and
will now go to the Assembly.

Consumer advocates supported the bill, arguing that insurers should not be
able to tie homeowners' financial histories to their insurance risk. They
said using credit reports to help write policies is especially harmful to
poor and minority homeowners, who sometimes have less-than-perfect financial
histories.

``Just because someone misses a Visa payment doesn't mean that their roof is
more likely to blow off in a windstorm,'' said Doug Heller, of the Foundation
for Taxpayer and Consumer Rights, which sponsored the bill. ``There's no
correlation.''

The voter-approved Proposition 103 bars California insurers from using credit
information when writing automotive policies. No ban exists for homeowners
policies, although few California companies have acknowledged that they rely
on credit information.

Industry representatives say studies prove a strong link between a person's
financial stability and their likelihood of filing a claim. As a result, some
companies compile what they call ``insurance scores,'' which combine elements
of customers' credit records with risk factors such as their history of
filing claims.

``Numerous studies have shown a strong correlation between insurance scores
and the risk of future loss,'' said Jerry Davies, director of communications
for the Personal Insurance Federation of California. ``There was a Texas
study where you could look at credit scoring and the people who make claims,
and it's obvious there's a correlation.''

Just a page long, Escutia's bill makes it illegal for insurers to refuse to
write policies or to cancel policies based ``in whole or part'' on credit
history. Companies would also be prohibited from using credit scores to set
premiums or place customers on payment plans.

Maryland has banned credit information from being used in
homeowners-insurance underwriting. But if the Escutia bill passes, California
would be the first state to ban the practice in both the homeowners- and
auto-insurance industries, Heller said.

Allstate pushed the issue to the forefront late last year when it applied to
the state insurance department for a 6.9 percent rate increase, acknowledging
that it uses financial history to determine risk and premium prices.

Led by state Insurance Commissioner John Garamendi, the department denied
Allstate's request for a rate increase.

``Credit scores have been called voodoo,'' department spokeswoman Nanci
Kramer said. ``The scores mean nothing.''

Allstate has since promised to suspend use of financial profiles as an
underwriting factor, and will take the debate to the Legislature, company
spokesman Bob Daniels said.
 

AN ARTICLE FROM THE INSURANCE JOURNAL
Credit Scoring: Agents, Carriers Look to Bridge Divisions

 
April 22, 2003
By Dave Thomas

 
Give them credit both agents and carriers have made credit scoring an issue that the industry can't turn its back on. From studies to hearings, the issue has soared to the top three or four issues in the industry and it doesn't appear to be going anywhere anytime soon.
States on the move According to Lynn Knauf, policy manager for the Alliance of American Insurers (AAI), "There continues to be a whole lot of activity out there. I haven't seen as many NCOIL introductions as predicted. We thought it would show up in 40 states, but we've only seen it in about 20, but they're still coming up though. As feared, the actual NCOIL model rarely shows up, instead you get versions of it. I think the creation of the NCOIL model itself increased activity. So many legislators had something to take back to their states." As Knauf pointed to, it seems many people have been releasing studies on credit scoring which is putting more attention on the subject for both agents and companies. "There are more studies putting light on credit scoring," Knauf commented. "I think we've come a long way as an industry answering some of the concerns of agents. One of the most significant things is the hold-harmless agreement in the NCOIL model, which also signals that whether or not a state looks at NCOIL, the industry has pretty much agreed on that hold-harmless arrangement,which basically says that if an agent uses credit scoring as prescribed by the company, that the company would reimburse the agent for any liability incurred as a result of that use. It basically says it would cover the agent if he is sued for some reason. It provides that extra layer of protection. Originally companies were not adverse to doing that but I think a lot of them argued they thought that would already be covered in their agency contracts. In several states agents were not comfortable with that may or may not be covered in their contracts."
Knauf also noted that agent opposition to credit scoring appears to be dwindling from what she's heard. "I've heard agents testify that their companies have been using it long enough that they see many policyholders getting discounts," Knauf continued. "I'm sure there are agents adamantly opposed to credit scoring, but I hear less and less of that. I think there still may be a strong area of disagreement on how renewal business is handled. I think we'll see a lot of enactments over the coming months, yet hopefully more uniformity. "Some consumer advocates remain opposed to credit scoring. With the recent public hearings in Texas, there were also consumers who were very vocal in opposing credit scoring. The issue of correlation is not a huge area of contention anymore.
There's so much evidence out there that there is a link between credit score and propensity of loss. That's not something that we have to spend all of our energy defending anymore. Instead, in Texas, those opposed to credit scoring testified that insurer use of credit information is not a consumer-friendly type thing for everybody. But, quite frankly, despite some of the heart-wrenching consumer testimony, the majority of consumers stand to benefit from credit scoring.
The health of the market place itself benefits from credit scoring. You had this truly independent study from the Business of Bureau Research from the University of Texas that clearly supports insurer use of credit. I can't imagine Texas would take any steps to totally ban credit scoring. There are a few states that do not allow credit scoring to be used, but it's not a recent thing. Last year Maryland enacted a law to severely restrict an insurers' right to use credit.
They came back this year trying to chip away even more at it, and it was soundly defeated." David VanDelinder, executive director of the Independent Insurance Agents of Texas (IIAT), whose association has not taken an active role on the issue, noted that, "There are some side issues that relate to credit scoring that are of most concern to us. Our membership is certainly split on credit scoring. The major concern our agents have is disclosure of information to the consumer. "We've been in a position in the past where we can't really tell a consumer why their rates are higher.
The versions of the bills being advanced here in Texas would require disclosure specific enough for a customer to say here are the elements of my credit information that adversely affected my insurance costs. We are very much in favor of being able to pass that information along to the customer." According to VanDelinder, there are around a dozen credit scoring-related bills working their way around the Lone Star State. "The two major proposals are included in the rate and form regulation bills, those are the ones being debated right now. I think as a result of the UT study, we'll probably see the carriers able to retain the use of credit scoring with some limitations and certainly with disclosure requirements.
That seems to be the consensus from the legislators we talk to. Our two issues in this are we want agents to be protected by insurance companies if they are sued as a result of use of this information and we also don't want a credit agency able to sell policy information we provide as part of this process. The whole issue of credit scoring has just been clouded by lack of information. Once it is fully disclosed, I think agents will be in much better position to carry the companies' water on this. "One of the questions raised in each state is is there really a statistical connection between credit information and losses?
The UT study confirmed that there is. Now that was done just in automobile. I think the underlying statistical connection is there, the problem is there is no causal connection between the two that we can point to. It's not intuitive, it is just something you have to accept as statistically accurate." While Texas face its issues, California is keeping its share of bills on the table. Victor M. Acevedo, President of Chapter 2 This transmission and any attachments to it contain confidential information belonging to the sender, and is intended only for the use of the individual or entity to whom it is addressed. Such confidentiality is not waived by virtue of its transmission. If you are not the intended recipient, you are advised not to read the message or any attachments to it, and any dissemination, distribution or copying of it is strictly prohibited. If you have received this transmission in error, please immediately notify the sender .
 

Calif. Commissioner to Speak at IICF Kick-off Luncheon
February 12, 2003

California Insurance Commissioner John Garamendi will speak at the Insurance Industry Charitable Fund's annual Kick-Off Luncheon in Los Angeles on Friday, Feb. 28.

Garamendi is expected to share some of his priorities and challenges as California's Insurance Commissioner.

The Los Angeles luncheon will be followed by a similar luncheon in San Francisco on Thursday, March 6, at which Pamela Erwin, president of the Wells Fargo Foundation, will be the featured speaker.

The luncheons are the IICF's first events each year leading up to its Gala reception in May—this year on May 2 at San Francisco's City Hall—and its IICF Bridge Week in October, which enables thousands of insurance industry employees to perform volunteer services at dozens of service organizations statewide.

The IICF distributed over $1 million in grants for the fourth consecutive year in 2002, and generated more than 10,000 service hours for charitable causes across the state.

Seating is limited. For more information or to make reservations, contact Diana Stone at (213) 612-5628 for the Southern California Luncheon, or Diana Hakenen at (415) 393-8456 for the Northern California Luncheon. You may also visit the IICF Web site at www.iicf.com.