Insurers Riled by Regulators’ Plans to Revisit Credit Qualifications

Sep 29th, 2010 | By Hot News Reporter | Category: Insurance Today

(WJS) – State regulators are drawing fire from auto insurers as they lay plans to revisit the use of factors such as consumers’ credit scores, occupations and education levels in determining rates paid by individual policy holders.

A committee of the National Association of Insurance Commissioners is hosting a hearing Thursday in Kansas City, Mo., at which insurers are expected to object to a planned request for data aimed at quantifying the impact of these factors in light of high unemployment and mounting home foreclosures.

Insurers say the effort is overkill given multiple past studies concluding credit-related factors, in use for about two decades, allow for more accurate underwriting. Also, they are worried about regulators’ ability to maintain confidentially of any trade secrets divulged, according to testimony that insurers and trade groups have submitted in advance.

The NAIC’s proposed survey is an outgrowth of concerns raised by consumer groups amid the worsening economy that families struggling financially will face higher insurance costs on top of lost jobs and homes. Some consumer groups have advocated a moratorium on the use of credit histories in underwriting car, home and health insurance.

For policy holders, it is too early to determine whether any change in industry practice will result from the proposed survey. Michael McRaith, director of insurance in Illinois and head of the committee running the hearing, said the goal is “to collect information so that policy makers are aware of the impact of any one factor. We need to move past the polarized rhetoric of whether [the use of credit-related factors] is a social issue or a predictive, actuarial issue” to learn “what is the actual practical impact on consumers.” Insurers maintain the effort is largely unnecessary.

“We believe it is simply too expansive, costly and misguided to justify,” the National Association of Mutual Insurance Companies, a trade group, summarizes in its comments posted on the NAIC website. Credit-based insurance scoring “must be the most studied and regulated tool currently utilized by insurers,” with multiple industry, government and academic studies over the years.

Credit-related scores used by insurance companies are variations of those used by banks and other lenders. Many insurers have proprietary versions that use selected elements from credit histories.

The studies have indicated that credit-based insurance scores are predictive of the number of claims consumers file and the cost of those claims. Among other explanations, insurance executives and regulators say consumers with better scores tend to be able to absorb some minor claims out of their own pockets. Critics of credit-based pricing methodologies raise fairness issues, saying families stuck in low-wage jobs may be more inclined to run into occasional credit problems, while higher-income families have more flexibility to avoid them.

Some insurers also said in written testimony that their customers’ credit-related scores have been holding steady overall. “Some consumers are seeing their scores improve, others are seeing their scores worsen, which is normal,” a lawyer for Allstate Corp. says. “We have not seen evidence that overall insurance scores are getting worse.” One reason: While delinquencies may be more frequent, balances and total debt burdens are decreasing.

The Property Casualty Insurers Association of America, another trade group, said “an overriding concern” is whether the planned survey would reveal companies’ business model to rivals, “by disclosing what underwriting and rating factors they use and to what degree they use them.”

The draft material states that responses “will be kept confidential to the extent allowed by state law,” while “aggregate data may be made public.”

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