UNDERWRITING RESTRICTIONS

CREDIT-BASED INSURANCE 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, in combination with other factors, to better predict the likelihood and cost of future claims. Actuarial studies have consistently demonstrated a strong relationship between an individual's insurance score and incurred losses. 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 operations. A study conducted by the Arkansas Department of Insurance found that 91% of drivers either receive a discount or are treated neutrally by the use of insurance scores.

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 generally is based on the model law adopted by the National Conference of Insurance Legislators (NCOIL). .

Reps. Luis Gutierrez, D-Ill., Barney Frank, D-Mass., and Melvin Watt, D-N.C., introduced H.R. 5633, the Nondiscriminatory Use of Consumer Reporting Act. The legislation would amend the Fair Credit Reporting Act to prohibit certain uses of consumer reports and consumer information for underwriting and rating automobile and homeowners’ insurance.

H.R. 6062, the Personal Lines of Insurance Fairness Act, was introduced by Rep. Maxine Waters, D-Calif. The legislation is cosponsored by Reps. Gutierrez, Watt, and House Financial Services Committee Chairman Barney Frank. The legislation prohibit the use of credit-based insurance scoring in underwriting or rating personal automobile and homeowner’s insurance.

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.

COMPREHENSIVE LOSS UNDERWRITING EXCHANGE (CLUE)

THE ISSUE IS…access to loss history consumer reports for insurance underwriting purposes.

IT'S IMPORTANT BECAUSE…The Comprehensive Loss Underwriting Exchange (CLUE) is a loss history information exchange that enables property/casualty insurance companies to access prior loss history of applicants during the underwriting and rating process. CLUE reports help insurers reduce costs, speed coverage decisions and detect fraud.

CLUE reports provide information on losses reported on the risk, and losses reported on the individual. Information is provided related to all reported losses within the past five years from the date of the request. Information is available on personal property and auto. Reported claims information includes the name of the insurance company, policy number, claim number, date of loss, cause of loss, amount(s) paid, claim status, policyholder name, address, vehicle operator name (if applicable), social security number, drivers license number, date of birth, vehicle description, and vehicle identification number (if provided by the contributing insurance company). The report also identifies insurance companies that have received a copy of the consumer’s loss history report.

CLUE reports are consumer reports, as defined by the Fair Credit Reporting Act (FCRA). Businesses or individuals with permissible purpose can access consumer reports. The FCRA also requires that a consumer reporting agency provide a copy of a consumer file to the subject consumer upon his/her request. The FCRA, as amended by the Fair and Accurate Credit Transactions Act of 2003 (FACT Act) enables consumers to receive one free disclosure of his/her file from certain types of consumer reporting agencies once per 12-month period.

Actuarial studies conducted by insurance companies have shown a correlation between a consumer’s prior loss history and his/her future insurance loss potential. As part of the underwriting process, insurers use a CLUE report to check the claim history of both the homeowner and the property that the homeowner is purchasing. More accurate data streamlines the decision making process, increases competition and allows insurers to offer coverage to more consumers at a fair price.

Legislation related to property claim databases has been passed in about one-third of the states and more than 30 states have considered legislation. During the various debates in the state legislatures, a top concern by many lawmakers centered on whether inquiries are counted as claims. Generally, questions about coverage are not recorded in the database. However, if a policyholder reports damage, even if ultimately no payment is made, the insurer is obligated to open a claim file and that would show up in the database. Claims may be closed without payment for many reasons. The loss that led to the claim may not be covered under the policy, the claim may be fraudulent or the cost of repair may be less than the deductible.

The National Conference of Insurance Legislators (NCOIL) developed a model bill on CLUE in 2005. The model act prohibits an insurer from basing homeowners underwriting decisions solely on the claims history of the previous owner; requires an insurer to act within 30 days of issuing a binder for an insurance policy that includes information in a CLUE report; and allows an insurer to base underwriting decisions and establish rates on the known condition or use of the premises as determined by an inspection of the premises. Information contained in the claims history report may not be more than five years old. In addition, the model act bars the use of inquiries made by a consumer to an insurer as a basis for denying, canceling or non-renewing a homeowners policy and the use of claims closed without payment unless more than one occurred in the previous three years or the claim closed is predictive of future loss. The use of claims history must be disclosed.

NAMIC POSITION…NAMIC strongly supports public policies that do not infringe on the use of CLUE reports for underwriting purposes. The use of CLUE reports provides important information to insurers that enable them to accurate evaluate and price coverage for risks. Consumers benefit by increased competition, more accurate pricing, streamlined processing and increased availability of coverage. Proposals to restrict or repeal the use of consumer reports, such as CLUE, would hamper the ability of insurers to correctly evaluate risks and could ultimately lead to less market availability and increased costs to consumers.

Posted: Tuesday, May 20, 2008 12:00:00 AM. Modified: Tuesday, May 20, 2008 3:13:35 PM.

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We are 1,400 property/casualty insurance companies serving more than 135 million auto, home and business policyholders, with more than $196 billion in premiums accounting for 50 percent of the automobile/homeowners market and 31 percent of the business insurance market. We are the largest and most diverse property/casualty trade association in the country, with regional and local mutual insurance companies on main streets across America joining many of the country’s largest national insurers who also call NAMIC their home. More than 200,000 people are employed by NAMIC members.