Legislative Action

Many states already require insurers to notify their policyholders if credit histories are used or play a role in adverse decisions such as raising rates or placing a policyholder in a higher rating tier. Many also already bar insurers from using insurance scores as the sole determinant in underwriting -- the process of deciding which applicants to accept and classifying those selected -- or pricing decisions. In this legislative session, some additional states passed such laws.

But a few states have gone further.

• A law passed in Washington State in March prohibits cancellations and nonrenewals based in whole or in part on credit history and allows credit information to be used only in conjunction with other "substantial" underwriting factors. It also limits the difference in rates based on credit-related factors to 20 percent and prohibits or restricts the use of credit in specific circumstances. These include the absence of credit history, debt collection accounts related to medical treatment and the initial financing or purchase of a new car or home, which adds a new loan to the consumer's debt history. In addition, insurers may not consider the number of credit inquiries in the report, or the total available line of credit, among other things.
  
  
• In Maryland, which had previously allowed the use of information from credit histories, the legislature passed a highly restrictive bill that bans the use of credit in homeowners insurance altogether and also in auto insurance underwriting decisions. And while credit-related information may be used in rating decisions about new auto insurance policies, the law imposes limits on discounts and surcharges to within a certain range. Credit information may only be used to provide a discount or surcharge of up to 40 percent. (Credit information can change the rates policyholders pay by up to 50 percent, the way it is used by some insurance companies.) An additional provision allows consumers to request a premium quotation that separately identifies the part of the premium attributable to the applicant's credit history.
  
  The Maryland bill also directs the insurance commissioner to study whether the use of credit has a disparate impact on any demographic group defined by race or socioeconomic status and to assess its impact on the Automobile Insurance Fund (MAIF), the state's insurer of last resort.
  
  The bill's restrictions make it difficult for insurers to use insurance scores. This could result in less accurate segmentation and pricing. One auto insurance company that now uses insurance scoring has said that the bill will cause premiums for 59 percent of its current policyholders (39,000 Maryland drivers) to rise by 14 percent. HB 521 takes effect in October and expires on Sept. 30, 2004.

Regulatory Action

• In Colorado, the insurance department rather than the legislature has addressed the regulation of credit scoring. Following hearings around the state, the department issued a regulation that, among other things, excludes people 65 and older with no recent credit history from impact. These so-called "no hits," generally people who have paid off a mortgage and do not use credit cards, suffer greater than average losses as a group. The bill also excludes the use of credit information that adversely affects scores if it is related to a divorce or debts of a former spouse; prohibits the use of information associated with medical debt collection accounts; and requires insurers to review new information in credit reports at policy renewal time and adjust underwriting and rating accordingly.
  
  
• The South Carolina Insurance Department is considering a regulation that would allow the use of insurance scoring in underwriting as long as it is not the sole factor considered. Where rate filings include credit scoring, information on losses that justify the surcharge or credit applied to the base rate would have to be submitted along with a separate breakout of loss data by age for policyholders that have no credit record. Credit reports would have to be rechecked at least every three years and could not be used for underwriting purposes on renewal policies that had been in force for three years.
  
  
• Some state insurance departments are also conducting educational campaigns to alert the public to the importance of maintaining a good credit record and help them correct inaccurate information.
  
  
• The National Association of Insurance Commissioners (NAIC) has set up a committee to determine whether the NAIC should adopt a model act of regulation addressing the use of credit-based insurance scores. (State legislatures may adopt NAIC model acts on a voluntary basis.) The NAIC is also considering whether to undertake an actuarial study on the predictive aspects of insurance scores. Studies carried out by Tillinghast and the Virginia Bureau of Insurance have shown a strong correlation between insurance scores and the filing of insurance claims, but according to several members of the NAIC committee, these studies focused on underwriting only. If conducted, the proposed NAIC study would also address the impact of credit history on rating.