NAIC Approves Development of Model Law to Regulate Credit-Scoring Vendors

The executive committee of the National Association of Insurance Commissioners agreed to develop a model law for the regulation of credit-scoring vendors as it continues to dig into the credit-scoring issue while property/casualty trade associations advocate for use of the scores in assessing risk.

"Our plan is to move forward with the model law development, and looking for states to join in that effort," said Illinois insurance Director Michael McRaith, chairman of the NAIC's property/casualty committee.

According to the request for development of the model, it would "establish a regulatory framework similar to that in place for regulation of advisory organizations," claiming the vendors "are not currently subject to regulation."

"What do you hope to accomplish by regulating the process that you don't accomplish by regulating the end result?" asked Alex Hageli, director of personal lines policy for the Property Casualty Insurers Association of America. Hageli and McRaith began a rhetorical back-and-forth about the reasoning behind the push.

"Are you suggesting that we should ignore insurance regulatory oversight for vendors who are involved in eligibility, pricing and coverage limitations for consumers?" McRaith asked him.

"I don't think there's a single vendor that has any input into those final determinations," Hageli argued.

A voice of opposition from the credit-scoring vendor community, Fair Isaac Corp., sent a letter to the committee arguing that "FICO and all insurance scoring vendors are regulated at the federal level by the Federal Trade Commission. In addition, the products and services provided by insurance scoring vendors to insurers must fully comply with all federal laws and state insurance laws." The Minnesota-based company also argued that it doesn't provide scoring information to insurers, but instead provides algorithms for use as analytical tools.

In another move in the often controversial subject of credit scoring, the NAIC has been developing a draft data call over several months to "evaluate how insurers use credit-based insurance scores," though it is voluntary for the states. A Kansas City public hearing is scheduled for the end of September to discuss the data call for personal automobile insurance.

McRaith suggested he has more hopes for the coming hearing than he has for previous attempts. "We don't want to repeat the hearings of last year," he said, which were characterized by "impenetrable rhetoric." Meanwhile, the committee agreed to extend a seven-day period to submit clarification questions to the NAIC.

"Credit scoring is simply a proxy for income," said Melvin Butch Hollowell, Michigan's insurance consumer advocate. "It should be banned in my state and every state."

The data call's information would be kept confidential, McRaith said, and the "identical data call" will allow a level comparison of the information from state to state.

(Jesse A. Hamilton, Washington bureau manager: [email protected])