States Drop Credit Scoring Study

Revised: 09/22/2006

States Drop Credit Scoring Study

By Daniel Hays, NU Online News Service, Aug. 4, 2004 - State regulators, who had been threatened with legal action if they continued their multi-state study of insurance carrier use of credit information in underwriting, said today they had agreed to drop the effort.

The announcement by the National Association of Insurance Commissioners said that after discussions with four industry trade groups, they had agreed to suspend the study.

The eight states involved said they made their decision when the industry agreed to provide data and to support the collaboration between state and federal regulators on a Congressionally-mandated study on the same topic by the Federal Trade Commission.

Under the agreement, the officers of the NAIC will appoint a five-member state panel to work with the FTC and the Federal Reserve Board “to analyze industry data and make findings as to the actuarial validity of credit scoring and its impact on various demographic groups,” the statement said.

Critics have said the process of credit scoring unfairly impacts minorities and fails to account for unique events that can skew ratings. Insurers say the process is objective underwriting that properly spreads the cost of risk.

NAIC officials met with Nat Shapo, an attorney and former Illinois insurance commissioner who represents the American Insurance Association, National Association of Mutual Insurance Companies, Property Casualty Insurers Association of America and Missouri Insurance Coalition for a series of discussions before the agreement was reached.

The PCI had announced previously that it was considering legal action if the states held to a demand that data be supplied by Aug. 20.

Mr. Shapo said the “AIA, NAMIC, PCI and MIC support the decision of the commissioners to suspend work on the multistate study and we pledge to work closely and collaboratively with the FTC study.”

He said he expected the eight states involved in the study to notify insurers that their call for data was being withdrawn.

The regulators' statement made no mention of the threat of litigation. “This is a win-win proposition for consumers and the industry,” said Scott B. Lakin, director of insurance in Missouri, the lead state in what was the multi-state study.

“Independent researchers will have access to the data needed to answer the important questions that state insurance officials have been asking about the effect of credit scoring on consumers, and the industry can keep its administrative burdens to a minimum,” he added.

Noting that federal regulators would retain the data collected and have final responsibility for the findings reported back to Congress, Mr. Lakin said he was confident that the collaborative effort would be successful. “If not,” he added, “the states have reserved the right to renew our multi-state study.”

“I'm pleased that the NAIC leadership can play a role in bringing the parties together on a contentious issue such as credit scoring,” observed Joel Ario, insurance administrator in Oregon and secretary-treasurer of the NAIC. “We look forward to implementing this agreement by appointing a fair and balanced panel of state regulators to work with the FTC.”

The FTC study is being designed pursuant to Section 215 of the Fair and Accurate Credit Transactions Act. The Act calls for a final report to Congress by December 2005.

Missouri Insurance Department spokesman Randy McConnell said yesterday that halting the research initiative was under consideration because the threatened litigation could impede the study, and there is an interest in “getting something produced of value to consumers.”

Robert Zeman, senior vice president for the Des Plaines, Ill.-based PCI, announced last month that as the deadline for the data call neared, the organization would look at options, “including a potential legal action.”

PCI as well as NAMIC and AIA have argued that the regulators, in commencing the study, were acting outside their legal authority.

Insurers argue that under law they can use credit scoring as a factor to set rates as long as they underwrite objectively, regardless of how the process impacts consumers.

According to PCI, only three jurisdictions--California, Hawaii and Maryland--have some form of credit scoring ban, and efforts to secure a prohibition in other states, including Missouri, have failed.

Insurers support legislation based on a model credit scoring bill drafted by the National Council of Insurance Legislators, which 20 states have adopted in some form.

The latest among the states to adopt the NCOIL model was New York. The measure there was approved June 22, and became law without the governor's signature on July 27.

Under the New York measure, carriers are prohibited from using income, gender, address, ZIP code, ethnic group, religion, marital status or nationality as a factor in credit scoring.

It also forbids denying a policy for personal lines insurance solely based on credit information, would not permit its use to deny a renewal, and its score would have to be recalculated if a consumer requested it.

Consumers must be notified of adverse action based on a credit score, and the factor could not be used against those with no credit history.

An online information service of the United Farmers Agents Association, Inc.