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last updated on Feb. 15, 2007

UNDERWRITING RESTRICTIONS

Credit Scoring

THE ISSUE IS...Restricting the use of credit-based insurance scores for underwriting purposes.

IT'S IMPORTANT BECAUSE...Credit-based insurance scores provide an objective and consistent tool that insurers use with other information to better predict the likelihood of future claims and the cost of those claims. Actuarial studies have consistently demonstrated a strong relationship between an individual's insurance score and the incurred losses on the policy. In addition, studies have established that the value of the information insurers obtain from using insurance scores cannot be found by using other traditional, more general rating factors.

Consumers benefit from insurance scores. The use of credit-based insurance scores encourages competition, enables insurers to offer coverage to more consumers at a fair price, and helps streamline the decision process.

Insurer use of credit is expressly permitted and governed by the federal Fair Credit Reporting Act (FCRA), which provides numerous consumer protections. In addition, to date, 48 states have taken some form of legislative or regulatory action on this important issue, with Pennsylvania and Vermont the lone exceptions. The scope of regulatory provisions adopted in each state varies considerably.

Even before insurance scoring emerged as a regulatory issue, several states (Arizona, California, Colorado, Idaho, Maine, Maryland, Massachusetts, Montana, New Hampshire, New Jersey, Texas, Washington, and Wyoming) regulated the ability of consumer reporting agencies to provide credit reports for underwriting purposes.

In many states, regulation of insurance scoring has expanded in a variety of ways. For example, many recently enacted measures prohibit insurers from using certain types of negative credit rating factors to determine an insurance score. Other measures require insurers to notify applicants and policyholders that credit history information may be used as an underwriting or rating factor; require insurers to notify applicants or insureds that adverse credit-related decisions have been taken regarding pending applications or existing coverage base; require insurers to reevaluate underwriting and rating decisions based on disputed information found to be incorrect; and require insurers to provide state insurance departments with actuarial justifications to support the use of insurance scoring models. Some states have approved relatively stringent--and in some cases prohibitive--laws, while others have adopted more lenient measures.

NCOIL Model Act

In 2002, the National Conference of Insurance Legislators (NCOIL) adopted the NCOIL Model Act Regarding Use of Credit Information in Personal Insurance. Each of the factors listed above are addressed in the model act. NAMIC staff actively participated in the policy deliberations that led to the creation of this model law and also have advocated its adoption in numerous states. To date, 27 states (Alabama, Alaska, Arkansas, Colorado, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Missouri, Mississippi, Maryland, Nebraska, New Hampshire, New York, North Dakota, Oklahoma, Oregon, Rhode Island, Tennessee, Texas, Virginia, and West Virginia) have approved laws or regulations that either replicate the basic NCOIL model language for each of these five factors or address the underlying issue in some other way.

The complete NCOIL insurance scoring model law includes additional factors, such as relevant definitions, indemnification of agents, prohibition on the sale of data submitted in conjunction with an insurance inquiry about credit history by consumer reporting agencies, and severability to ensure that if any part of the Act is determined invalid due to interpretation of or change to the federal Fair Credit Reporting Act, the remainder of the Act will remain in effect. NCOIL identifies the following 24 states as having essentially based the entirety of their current insurance scoring laws on the NCOIL model act: Alabama, Arkansas, Colorado, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Mississippi, Nebraska, Nevada, New York, North Carolina, North Dakota, Oklahoma, Rhode Island, Tennessee, Texas, Virginia and West Virginia.

Prohibited Uses

NAMIC has identified a total of 42 states that have either approved legislation or adopted regulatory provisions prohibiting certain uses of credit history information or banning the use of certain negative credit factors in the formulation of an insurance score. States that have adopted prohibitions on all or some of the NCOIL model's proscribed uses of credit history or certain negative credit rating factors include Alabama, Alaska, Arizona, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, West Virginia, and Wisconsin.

Dispute Resolution

To date, 36 states have approved dispute resolution measures. States that have thus far adopted specific language setting forth the insurer's responsibility to re-underwrite and re-rate applicants when it is determined that incorrect or incomplete credit history information has been erroneously used include Alabama, Alaska, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Nebraska, Nevada, New Hampshire, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Tennessee, Texas, Virginia, Washington, and West Virginia.

Initial Notification

Thirty-five states have approved measures requiring insurers to notify consumers that the insurer may obtain and utilize an insured or applicant's credit history information for underwriting and rating purposes. Included in this list are Alabama, Alaska, Arkansas, Colorado, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Hampshire, New Jersey, New York, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Tennessee, Texas, Utah, Virginia, West Virginia, and Wisconsin.

Adverse Notification

NAMIC's update has also determined that 39 states have enacted laws requiring insurers to notify and explain to consumers any adverse actions taken, in accordance with the federal Fair Credit Reporting Act. States that have adopted adverse notice requirements include Alabama, Alaska, Arizona, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, Tennessee, Texas, Utah, Virginia, Washington, West Virginia, and Wisconsin.

State Filing Requirements

Thirty-five states have approved measures requiring insurers to file insurance scoring methodologies with the state insurance department. Several require this information to be filed along with all other pertinent information included in the state rate filing and approval process. The states that have so far adopted laws or regulations mandating the filing of credit history-related information include Alabama, Alaska, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Oklahoma, Oregon, Rhode Island, South Carolina, Tennessee, Texas, Virginia, Washington, and West Virginia.

Prohibitions on Use of Credit History Information

NAMIC has also identified a small group of states (Georgia, Hawaii, Maryland, Oregon, and Utah) that have established actual prohibitions on the use of credit history information in certain circumstances. For the most part, these prohibitions pertain to private auto insurance coverage. In Georgia, private passenger auto writers are prohibited from using underwriting criteria that result in fictitious groupings of risks that contribute to unfair competition. Hawaii regulates auto insurance with what is arguably one of the more stringent provisions, prohibiting underwriting standards or rating plans from being based in whole or in part on a person's credit bureau rating.

In Maryland, auto and homeowner insurers are prohibited from refusing to underwrite, renew, cancel, or base particular payment plans in whole or in part on an individual's credit history information. Private passenger auto insurers are, however, permitted by Maryland law to use credit history information to rate new policies. Oregon Revised Statutes currently disallow the cancellation or non-renewal of personal insurance coverage in cases where the policy was previously in effect for 60 days or longer, if the adverse action was based in whole or in part on credit history or an insurance score. Finally, Utah law prohibits auto insurers from using credit information from canceling or non-renewing coverage in effect for 60 days or more, to determine rates except to establish premium discounts, and to refuse new or additional coverage to named insureds or household members.

NAMIC POSITION...NAMIC supports the right of insurers to use credit-based insurance scores in making underwriting and rating decisions. Credit-based insurance scoring has been proven time and again to be a strong predictor of insurance loss, allowing companies to more accurately underwrite and rate their business. As a result of credit-based insurance scoring, many companies affirm that they are able to write more business with greater confidence and that the vast majority of policyholders directly benefit realizing better rates and more choices in the marketplace.