NAMIC: Credit-Based Insurance Scores Proven to be Fair, Accurate and Effective

 

WASHINGTON (May 12, 2010) Credit-based insurance scores have been repeatedly proven to accurately predict loss with no discriminatory effect, the National Association of Mutual Insurance Companies(NAMIC) said today.

As the House Financial Services Subcommittee on Financial Institutions and Consumer Credit examines the issue in a hearing today, NAMIC pointed to numerous studies showing that the use of credit-based insurance scores has been beneficial to consumers through offers of discounted premiums for those with good credit.

In a letter to committee Chairman Luis Gutierrez, D-Ill., and ranking member Jeb Hensarling, R-Texas, NAMIC noted that “the use of insurance scores encourages competition and enables insurers to offer coverage to more consumers at a fairer price. Furthermore, consumers benefit from insurance scoring because it keeps the insurance marketplace competitive, resulting in lower prices, better service, and more product choices.”

To date, at least 17 studies have been conducted with regards to credit-based insurance scores; by among others the Texas Department of Insurance, the Arkansas Department of Insurance and the Federal Trade Commission.  “Every study on credit-based insurance scoring has concluded the same thing, that insurance scores have no discriminatory effect, either directly or as a proxy,” said Dylan Jones, NAMIC Federal affairs director.

Jones also sought to emphasize the distinction between credit scores and credit-based insurance scores. “They are not the same thing,” he said. “A credit score is used to predict the likelihood of an individual to default or be delinquent in their payments. An insurance score predicts the likely ‘loss ratio relativity’ of a particular individual, and can be based on over a dozen other factors in addition to credit information.” A loss ratio is determined by dividing the amount collected in premiums by the amount paid out by an insurance company in claims, and is used in this way to predict whether an individual will experience more or fewer losses than average.

Insurance is a state regulated industry, and currently 48 states have taken some form of legislative or regulatory action on this issue. The regulatory provisions adopted in each state are generally based on the model law adopted by the National Conference of Insurance Legislators. Insurer use of credit information is also governed by the federal Fair Credit Reporting Act as well as federal and state anti-discrimination laws.

“Insurers use insurance scores to provide discounts to consumers with good credit who have been statistically shown to be less likely to incur a loss,” said Jones. 

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Matt Brady
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