NAIC to Launch Hearings, Data Call on Insurance Scoring

The National Association of Insurance Commissioners is preparing to launch a new initiative on credit-based insurance scoring that will result in a nationwide data call for automobile insurers.

The NAIC's Property and Casualty Insurance Committee is finalizing a plan to elicit comprehensive information on the use of credit scores in insurance scoring, Chairman and Illinois Insurance Director Michael McRaith said. The NAIC will share the draft proposal in the "very near future" and request public comment, he said. The NAIC will likely hold two public hearings, he said, one in the form of a conference call and another in a public forum. The data call could be issued within the next 60 days.

The goal is to collect "fact-based data sets," McRaith said. "Our first chore is to do what we're doing, attempting to move past the rhetoric, move past the ideological diatribe."

The anticipated NAIC action comes on the heels of a Michigan Supreme Court decision to block the state's six-year-long attempt to enforce a rule banning the practice. In a 4-3 decision, the court sided with the insurance industry argument that the use of credit-based insurance scoring for rate-making should be allowed under the state insurance law (BestWire, July 9, 2010).

The court majority ruled that state insurance regulators exceeded their authority in promulgating the rules. The judges also said the state "failed to show that insurance scoring produces rates that are 'unfairly discriminatory.'"

"Up and down, the courts, the legislators, the regulators, and the federal regulators ... have all reached the same conclusion," said David Snyder, vice president and associate general counsel for the American Insurance Association. "To continue to raise the issue is a total waste of resources."

Whether credit-based insurance scoring is actuarially sound is one issue, McRaith said. But that does not answer the question of whether it is good public policy, he said. Regulators should still evaluate whether the use of credit scores has a disparate impact on minorities and lower-income consumers, McRaith said.

"I don't think whether it predicts the likelihood of a claim is the question the country is looking to address," he said.

McRaith and Oklahoma Insurance Commissioner Kim Holland, then-chairwoman of the Market Regulation and Consumer Affairs Committee, held joint hearings last year on credit-based insurance scoring. The industry "made a reasonable case that credit scoring is predictive of risk,"Holland told BestWire earlier this year. However, still to be determined is whether there is an unfair impact on minorities, she said (BestWire, Feb. 22, 2010).

Neil Alldredge, senior vice president of state and policy affairs for the National Association of Mutual Insurance Companies, doubts a data call would provide regulators with any information not already available to them from past hearings, past studies, rate filings and annual reports. "At this point, I'm not sure what there is left to wring out of this," he said.

States are responding to the real needs of consumers without abolishing the practice, according to the industry. Connecticut, Iowa and Kansas are among the states to adopt revisions to the National Conference of Insurance Legislators' model law on credit-based insurance scoring, Alldredge said. Concerned about the impact of job and home losses caused or exacerbated by the recession, NCOIL adopted a revised model to require insurers using the practice to allow leeway for customers' "extraordinary life circumstances." Property/casualty insurers supported the amendment as a fair compromise between insurer and consumer interests (BestWire, July 12, 2009).

McRaith's committee adopted the credit scores issue as a top priority for 2010 late last year. The committee set a target date of November 2010, in time for the NAIC's third and last national meeting of the year, to: define what a credit-based insurance score is; evaluate how insurers use the scores; determine how such scores have affected policyholder premiums, given current economic conditions; and potentially develop regulatory or legislative recommendations and/or models to address the issue. But at the same time, consumer groups supporting restrictions on the practice blasted the NAIC for what they said was continuing to kick the issue down the road (BestWire, Nov. 18, 2009).

In March, Maryland lawmakers rejected a bill to ban the use of credit scores in determining automobile insurance rates; the state already limits the use of credit-based insurance scoring, allowing it only for rates on new policies, and then only in a limited range (BestWire, March 30, 2010). Washington state lawmakers rejected Insurance Commissioner Mike Kreidler's bid to ban credit-based insurance scoring by not voting for the bill ahead of a key procedural deadline, (BestWire, Feb. 18, 2010). The Wisconsin legislature rejected a ban last year (BestWire, Sept. 15, 2009).

"It's up to the NAIC to prove that credit scoring has nothing whatever to do with how a person drives, that it is punitive," said Butch Hollowell, Michigan's insurance consumer advocate and a current NAIC-designated consumer representative.

(By Sean P. Carr, Washington Correspondent: [email protected])