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Credit-based Insurance Scoring Should Not be Banned During Economic Crisis, NAMIC Says

INDIANAPOLIS (March 20, 2009) – The National Association of Mutual Insurance Companies (NAMIC) today countered assertions by Florida’s chief financial officer, Alex Sink, about the value of credit-based insurance scoring during the current economic crisis. NAMIC responded to Sink’s comments in which she said that auto insurers should not be using this underwriting tool at a time when people are being hit hard financially.

“We appreciate and understand CFO Sink’s concerns about insurance consumers during these difficult economic times; however, insurers have seen no indication of insurance premiums going up as a result,” said Liz Reynolds, NAMIC’s Southeast state affairs manager. “In fact, restricting the use of this valuable underwriting tool at this time would adversely affect the majority of Floridians by resulting in higher, not lower, premiums.”

There has been no evidence that the economic downturn has resulted in increased numbers of insureds or applicants paying higher premiums, Reynolds explained. “Companies already have procedures in place to address extraordinary life events and help policyholders mitigate the effect of those events on credit-based insurance scores and, ultimately, insurance premiums.”

NAMIC recently released a policy briefing that analyzes credit-based insurance scoring in the context of the current economic crisis. Titled “Credit-Based Insurance Scoring: Separating Facts from Fallacies,” it explains that the turmoil is “rooted in a failure to properly assess risk. It is only due to insurers’ recognition of credit-based insurance scoring as a highly valuable risk assessment tool that it has become a common practice. It would be both ironic and inappropriate for a financial crisis caused by failure to assess risk to prompt policymakers to take a valuable risk assessment tool out of the hands of insurers.”

The paper traces the history of insurance scoring and explains that the use of this underwriting tool is beneficial to the vast majority of insurance consumers despite recent comments to the contrary. The policy briefing comes as 24 states have introduced proposals to severely restrict or completely ban the use of this underwriting tool. It is likely Congress may consider similar proposals.

“The use of insurance scores encourages competition and enables insurers to offer coverage to more consumers at a fairer price,” the briefing states. “Furthermore, consumers benefit from insurance scoring because it keeps the insurance marketplace competitive, resulting in lower prices, better service, and more product choices.”

The paper is intended to educate legislators and other policymakers who may be unfamiliar with insurance scoring and its use as a predictive tool.

“Insurance scores are not credit scores,” the paper explains. “Credit scores predict the likelihood that an individual will default or be delinquent in paying a credit obligation. By contrast, a credit-based insurance score predicts the likely ‘loss ratio relativity’ of a particular individual … Loss ratio relativity measures whether an individual will experience more or fewer losses than average.”

The paper spells out some popular misconceptions about insurance scoring. “Some critics have argued that credit-based insurance scoring should be prohibited because it unfairly discriminates against minorities. This is a specious claim because insurance scoring does not consider characteristics such as race, ethnicity, gender, national origin, or income level,” the paper says.

It also describes the model law adopted by the National Council of Insurance Legislators’ that imposes restrictions on insurers’ use of credit information. Twenty-seven states have adopted the NCOIL model law and other states have enacted portions of it.

“Another popular misconception is that an individual’s insurance score will be affected if too many requests are made to examine the individual’s credit information,” the briefing explains. “This is not an issue in states that have adopted the NCOIL model, as it expressly prohibits insurers from treating as a negative factor credit inquiries not initiated by the consumer or inquiries requested by consumers to examine their own credit information.”

For further information, contact
Nancy Grover
Director - Media Relations
(202) 628-1558 Tel
(202) 628-1601 Fax
ngrover@namic.org

Posted: Friday, March 20, 2009 12:00:00 AM. Modified: Wednesday, April 08, 2009 3:27:41 PM.

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