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last updated on December 16, 2009

Credit-Based Insurance Scoring

Credit-based insurance scores are a proven predictor of loss without a discriminatory effect - and the barring or limiting of their use by insurers would harm consumers.

NAMIC OPPOSES any attempt to restrict or prohibit the use of credit-based insurance scoring, which would deprive insurers of the use of a statistically proven underwriting tool and result in higher premiums for consumers.

BACKGROUND

Credit-based insurance scoring has been repeatedly proven to be a strong predictor of insurance loss that better enables companies to underwrite and rate their business – and provide their customers with the best rates available.

Consumers benefit from insurance scoring because it keeps the insurance marketplace competitive – which results in lower prices, better service, and more product choices. Insurance scores are used with other information to better predict the likelihood of future claims and the cost of those claims.

Importantly, insurance scores are not credit scores. Credit scores predict the likelihood that an individual will default or be delinquent in paying back an extension of credit. An insurance score predicts the likely “loss ratio relativity” of an individual. A loss ratio is the amount paid out by an insurance company in claims divided by the amount collected in premiums – thereby predicting whether an individual will experience more or fewer losses than average.

Insurance scores are only one of more than two dozen factors that are used by insurers to make an underwriting or rating decision about an individual. Other factors typically include an individual’s motor vehicle report, claims history, or the condition of one’s home.

In recent years states have begun enacting laws and regulations for insurers to follow in using an individual’s credit information. In 2002, the National Conference of Insurance Legislators (NCOIL) created a “Model Act Regarding Use of Credit Information in Personal Insurance,” which became the basis for additional legislation in other states. Today, 47 states have laws or regulations pertaining to credit-based insurance scoring.

In addition to state oversight, numerous studies have found that credit-based insurance scores have no discriminatory effect, either directly or by proxy, on consumers. Between 1996 and 2007, there have been 18 studies on the use of credit-based insurance scoring conducted by the Federal Trade Commission, the Federal Reserve Board, state regulators and others, and they have consistently found a strong relationship between an individual’s credit score and incurred losses for both personal auto and homeowners policies without discriminatory effects. In fact, House Financial Services Committee Chairman Barney Frank, D-Mass., has recognized that credit-based insurance scoring has been statistically proven to be effective.

Currently, the FTC is in the process of conducting a comprehensive study on the impact that insurance scoring has on homeowners insurance premiums. NAMIC is confident the study will reach the same positive conclusions as the many others.

While no legislation restricting or prohibiting the use of this valuable underwriting tool has been introduced in the 111th Congress, on March 24, 2010, the House Subcommittee on Financial Institutions and Consumer Credit held a hearing examining the overall issue of credit scores during which insurance scores were discussed. A second hearing focusing specifically on insurance scores will be held mid-May.

NAMIC continues to work with the administration, Members of Congress and their staffs to highlight the benefits this important underwriting tool provides to both insurers and consumers alike.

CONTACT INFORMATION

For more information, please access our NAMIC Policy Briefing on credit-based insurance scores or contact Dylan Jones, federal affairs director, at (202) 628-1558 or djones@namic.org.

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Every two years, NAMIC presents their coveted Benjamin Franklin Public Policy Award© to lawmakers who have supported a stronger insurance market at least 75 percent of the time. This is demonstrated based on their support of NAMIC's position on certain roll call votes taken, or being a principal player/sponsor on legislation affected the property/casualty insurance industry, during the previous Congress.