INDIANAPOLIS (June 14, 2007) — A new rule announced by the Florida Office of Insurance Regulation governing insurers’ use of credit-based insurance scoring is vague, unreasonable, and conceptually flawed, says the National Association of Mutual Insurance Companies (NAMIC).
“The OIR has embarked on a crusade to effectively ban credit-based insurance scoring in Florida, despite having no statutory basis for doing so,” said Liz Reynolds, NAMIC’s southeast regional state affairs manager. “Its main tactic has been to develop rules that equate ‘unfair discrimination’ with practices that allegedly have a ‘disproportionate impact’ on particular subgroups in the population.”
Unfair discrimination, typically defined as charging insureds with similar risk profiles different rates or offering them different coverage terms, is illegal not only in Florida but throughout the country. However, no state prohibits insurance practices that have a so-called disproportionate impact on population subgroups. Such a law would effectively ban virtually every risk assessment criterion, as no risk variable has exactly the same statistical impact on every subgroup in the population, Reynolds explained.
The OIR tried to ban credit-based insurance scoring earlier this year by implementing a rule that forced insurers to prove that their use of credit information does not have a disproportionate impact. That edict was struck down by a Florida administrative law judge, who called the OIR’s failure to define “disproportionate impact” arbitrary and capricious.
“This time the OIR has attempted to set forth a definition of the term, and the result is largely incoherent,” said Robert Detlefsen, NAMIC’s vice president of public policy.
Detlefsen pointed to a provision in the rule that reads: "Disproportionate Impact" means that the percentage of the insured population in one or more enumerated subcategory differs significantly from the percentage of premium that is to be paid by persons in that subcategory as a result of the use of credit reports or credit scores in underwriting or rating. A statistically validated test of the significance of the differences in premium percentage versus population percentage shall be submitted. If the probability that the difference shown is due to chance is 10 percent or less then the proposed use of credit reports or scores will have been shown to have a disproportionate impact with respect to that class of persons."
“The rule gives no indication of what would constitute a ‘significant’ difference between the percentage of premium paid by a group and its percentage in the general population,” Detlefsen said. “So, if Insured Population A is 15 percent of the entire insured population in Florida, and it accounts for 16 percent of the aggregate premium paid by the entire insured population, this could be considered a ‘significant difference’ — and hence unfairly discriminatory — unless the insurer could show that there is at least a 10 percent chance that the ‘differences in premium percentage versus population percentage’ is due to ‘chance.’ In terms of statistical analysis, this makes no sense.”
While key portions of the rule are unintelligible, that is not the primary reason that the OIR’s assault on credit-based insurance scoring must be resisted. “Every study has shown that credit information is highly correlated with risk of loss,” Reynolds said. “To try to ban an actuarially valid underwriting tool because of slight statistical differences in the way it affects certain groups is to undermine the very foundation of risk-based underwriting and pricing of insurance.”
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Posted: Thursday, June 14, 2007 12:00:00 AM. Modified: Thursday, June 14, 2007 1:37:54 PM.
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