Although credit scoring use remains controversial in some jurisdictions, an estimated 90% of property and casualty personal lines insurers now use credit score information in underwriting and/or rating. Credit score information can include information on individual applicants or policyholders obtained by insurers from consumer credit reports, accident reports and prior losses, and subsequently used for risk assessment and policy pricing. In the highly competitive personal lines market, the majority of insurers agree that credit score information is a strong predictive risk factor and valuable rating and underwriting tool.
In spite of its usefulness, regulatory concerns persist concerning insurers’ use of credit scoring. After years of legal wrangling between Michigan regulators and the insurance industry, on Thursday, July 8, the Michigan Supreme Court finally ruled that insurance companies can consider credit scores when setting auto premiums. Some states, including Maryland and Massachusetts, continue to effectively prohibit the use of credit scoring, citing concerns such as the high prevalence of errors in consumer credit reports and a disproportionately negative impact on young, old, low income and minority consumers.
In all jurisdictions, state regulators retain a strong interest in monitoring that insurer use of credit scoring is appropriate and compliant with law and provides adequate consumer protections. Credit scoring use is regulated under Federal law, notably the Fair Credit and Reporting Act and privacy laws, and state unfair trade practice and antidiscrimination laws, state filing requirements, and state credit use laws that may be based on the National Conference of Insurance Legislators (NCOIL) Model Credit Use Act.
In July 2009, the NCOIL Model Act was amended to include the “extraordinary life circumstances” exception. Under this provision, insurers that use credit information for underwriting or rating purposes provide a consumer with an opportunity to mitigate the impact that extraordinary life circumstance may have on his or her insurance score. Extraordinary life circumstances may include divorce, serious illness, job loss or death of an immediate family member, identity theft, overseas military duty and other major financial hurdles. Given today’s challenging economic climate, the establishment of this exception can provide an added measure of consumer protection while preserving the insurer’s ability to use insurance scores as an underwriting and rating tool.
Indiana, Illinois, Kansas and New Hampshire have implemented regulatory changes incorporating the NCOIL Model Act extraordinary life circumstances exception in 2010. Additionally, Connecticut has enacted House Bill 5014 that adds the exception effective July 1, 2011. New Hampshire extensively rewrote credit scoring regulations effective July 1, 2010, including adoption of the extraordinary life circumstances exception. Department of Insurance Actuary David Withers indicates that the overall goals of New Hampshire’s amended regulations are to provide minimum standards and expectations for insurers in supporting and communicating with consumers and to attempt to minimize the possibility of legislative action which could be adverse to consumers and the competitive personal lines market.
The various state laws provide insurers with some flexibility on implementation of the extraordinary life circumstances exception but generally mandate that disclosure of the exception, as well as appropriate insurer contact information, be provided at policy inception, renewal and upon adverse policy action that is based on consumer credit information. According to New Jersey Chief of Market Regulation & Consumer Protection Anne Marie Narcini, results of an insurer survey on extraordinary life circumstance disclosure methods indicate that insurers use several methods. Some provide copies of instructions to agents to advise consumers of extraordinary life circumstances appeal information at the point of sale and then follow up with written notice; direct writers also provide telephone scripts for their customer service representatives. Internet sales by insurers may include pop up messages with links on how to provide information on extraordinary life circumstances appeals. Many insurers include the information within the notices they send to comply with the Fair Credit Reporting Act.
Insurers must review the applicable laws of each state in order to develop and implement appropriate underwriting procedures to accommodate the extraordinary life circumstances exception when consumer credit information is used. While credit scoring use continues to be a legislative “hot topic,” the extraordinary life circumstances exception appears to be an increasingly used means of achieving greater consumer protection while preserving a valuable industry tool.
Editor’s Recommendation
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