All Insurers Licensed to Write Private Passenger Automobile Insurance and Homeowners Insurance In Virginia 

RE:      Use of Credit Scoring Models in Rating Auto and Homeowners Insurance Policies

             It has recently come to the attention of the State Corporation Commission Bureau of Insurance that it is possible to change the mathematical components/formulae of a credit scoring model used for calculating rate levels, thereby changing the final rate charged to an insured. Section 38.2-1906 of the Code of Virginia requires that all rates and supplementary rate information be filed prior to their use.  

            Effective immediately, any insurer that intends to use credit scoring models in rating or tiering must file the models prior to their use.  Insurers currently using credit scoring models in rating or tiering must file their models no later than September 1, 2002.

 The models will be considered part of the rate filing and will be open to public inspection according to § 38.2-1907.

             If you have any questions regarding this matter, please call Rebecca Nichols, Supervisor of the Personal Lines Rates and Forms Section, at (804) 371-9965 or send an e-mail to rnichols@scc.state.va.us.           Alfred W. Gross      Commissioner of Insurance

Study: Race, Age Have Credit Score Impact

By Daniel Hays


NU Online, Jan. 27, 12:26 p.m. EST—Insurers use of credit scores to evaluate auto insurance risks can have an unequal impact on persons who are younger, poorer and members of a racial minority group, a limited study by the Washington State Insurance Commissioner's Office has found.

The report released last week recommended that more research be done with a larger sample. The initial study looked at three insurers, contacted 3,000 consumers, and examined 212 policies cancelled on the basis of credit scores.

Insurers had a measured response to the findings.

The National Association of Independent Insurers in Des Plaines, Ill. said the results would not impact the debate on the issue in the state, noting that the legislature had already passed legislation "severely restricting the use of such scores in 2002.

NAII noted, however, that the report might have impact in other states and with the National Association of Insurance Commissioners.

The American Insurance Association in Washington, D.C. said the study should be viewed carefully commenting that its recommendations are "more than anything, an admission that the study should be viewed carefully."

Use of credit scoring "has encouraged competition and enabled insurers to more precisely underwrite and price their products, allowing individual consumers to pay a more accurate price. Because insurers can more exactly pinpoint the risk a particular consumer presents, they can rate them accordingly," AIA said.

Among the patterns the study said it found were that older drivers have higher credit scores, lower credit-based rate assignments, and less likelihood of lacking a valid credit score.

Examining income, the study found people in the lowest income categories, less than $20,000 per year and between $20,000 and $35,000 per year, often experienced higher premiums and lower credit scores. More people in lower income categories were found to lack enough credit history to have a credit score.

Looking at racial difference, the study found that non-whites had higher premiums. Where insurance was cancelled based on credit score, minorities who were not Asian/Pacific Islanders had greater difficulty finding replacement insurance, and were more likely to experience a lapse in insurance while they searched for a new policy.

The study noted that a number of incidents had led to concerns about credit scoring. It cited the case of a couple that was denied the best credit score because they pay all their credit cards in full each month.

Among other cases mentioned was that of a divorced mother who sought bankruptcy protection when her ex-husband defaulted on his business debts and she was in danger of losing her home. As a result, her credit score dropped and her insurance costs rose.

An American citizen, the report said, had established good credit in Canada, but when he returned to Washington, after 21 years, he had difficulty finding reasonably priced auto insurance because carriers claimed he had no credit history.

Download Printable PDF on Maryland Credit Scoring

Va. Lawmakers Consider Tightening Use of Insurers' Underwriting, Rating Tools
February 24, 2003


As the final days of the 2003 Virginia legislative session unfold, lawmakers are considering several bills that would impact the resources insurance companies currently use to underwrite and rate their products.

Senate amendments to House Bill 1948 provide that prior loss histories garnered from the Comprehensive Loss Underwriting Exchange (CLUE) database cannot be the sole basis for an "adverse" underwriting decision. The bill applies to the loss history of a previous owner of a property.

In addition, the revised measure only concerns underwriting, not the rating of policies. Prior to the Senate amendments, the bill would have required physical inspections to be performed if an insurance company wanted to use previous loss histories of prior owners of a property in forming an underwriting decision.

"Even though the Senate amendments give companies more room for their underwriting practices, we still have concerns on the restrictions of using CLUE reports," Greg LaCost, counsel of the National Association of Independent Insurers (NAII), said. "The homeowners market may harden even more with strict mandates on the use of the CLUE database. CLUE reports indicate the number of claims reported and how many of those claims resulted in loss payments. These are important factors insurance companies use to determine risk and create fair and accurate prices for homeowners insurance policies.

"Now, more than ever, companies need to utilize prior loss history for underwriting purposes, as water and mold claims continue to sharply increase."

NAII also is concerned that if physical inspections become mandated, it would be costly for insurers and, consequently, consumers. Also, NAII does not believe an inspection would reveal any concerns if the area in question was covered by new paneling or paint, for example.

CLUE is a common source insurers' use to collect claims and loss data when asked to write a new policy on an existing home. These personal property reports contain up to five years of personal property claims and include claim information such as date of loss, type of loss and amounts paid. Companies representing 90 percent of the homeowners market provide claims data to CLUE.

HB 1948 unanimously passed the House and passed the Senate Commerce and Labor Committee with amendments. The measure now goes back to the House for approval.

Lawmakers are also debating the merits of two credit-based insurance scoring bills. NAII supports both HB 2535 and SB 1284, which do not permit insurers to use credit information as the sole reason for making underwriting and rating decisions. Also, the bills only allow credit information to be used that is derived within 90 days for new business and 120 days for non-renewals. The bills also contain notice requirements and an exception process for catastrophic illness, injury or death of a spouse or member of the same household, among other stipulations.

"We are pleased that the legislature recognized the usefulness of this tool," LaCost said.