Study on Scoring's Disparate Impact Tabled
CHICAGO — A National Association of Insurance Commissioners' (NAIC) proposal to study the possible disparate impact of the use of credit-based insurance scoring has been tabled after vehement opposition from insurance lobbying groups.
The proposed study was "the subject of many public and private discussions," admitted Oregon Insurance Administrator Joel Ario, co-chair of the NAIC Credit Scoring Working Group that decided Monday to seek further legal advice on the matter and allow states to go ahead with their own studies apart from the NAIC.
"We're not saying the study should not happen," Ario said at a meeting of the working group. "We're saying it should not happen right now."
Washington Commissioner Mike Kreidler, co-chair of the working group and a leading proponent of the study aimed at determining whether the use of credit-based insurance scoring has a disproportionate impact on racial and ethnic minorities, agreed with the decision.
"We've decided to postpone the study to allow for a legal analysis and peer review process," Kreidler said. "There should be a state-by-state analysis about whether they want to proceed on their own; it's up to each individual state. Certain states would like to proceed on their own and could produce a useful study if they have enough diversity."
The Texas Legislature, for example, has ordered its Insurance Department to conduct a study on credit-based insurance scoring's impact on minorities in the Lone Star state. Another member of the working group proposed a collaborative study by states in a "coalition of the willing."
A coalition of all the property/casualty insurance trade groups objected to the study on legal, methodological and public policy grounds and called the decision a win for consumers. Interestingly, so did at least one consumer representative.
A win for consumers?
"By putting the NAIC study in the background, this helps consumers by taking away a bogus platform from insurers who were using that study to throw out these so-called legal analyses," said Birny Birnbaum, executive director of the Austin, Texas-based Center for Economic Justice.
"This ends the laborious debate over the issue at NAIC, and it's now clear a number of states intend to do studies and now they can go ahead and do that without having to deal with these delaying tactics at NAIC," said Birnbaum, whose registration fee is waived and whose lodging and travel expenses to the meeting are reimbursed by the NAIC under a special program to encourage consumer participation.
"It's much more difficult to do anything through the NAIC unless there's near unanimity," Kreidler said. Ario claimed that a disproportionate impact study could be conducted through a state insurance department's legal authority to prevent unfairly discriminatory insurance practices, though he admitted that such an effort would face just as much industry opposition as an NAIC-sponsored study.
Testifying at the working group's hearing on behalf of the industry was former Illinois Insurance Director Nat Shapo, now a partner in the law firm of Sonnenschein Nath & Rosenthal. The crux of Shapo's case to the working group was his contention that the alleged disparate impact of insurance scoring was an invalid subject for an NAIC study because it is "not the default rule for evaluating discrimination in the federal courts. Under Washington v. Davis, the Supreme Court ordinarily requires a showing of intentional discrimination to establish a civil rights violation."
It would be impossible for insurers to be using insurance scoring to intentionally discriminate, Shapo contended, because they do not collect information about insureds' racial or ethnic backgrounds.
Study proponents, including Birnbaum, disagreed.
"Every state prohibits discrimination on the basis of race, religion and national origin," Birnbaum said via e-mail. "It is both relevant and necessary to examine whether credit scoring, as used by insurers, is a proxy for these prohibited factors. We are not enforcing existing unfair discrimination laws if we allow proxies for prohibited factors."
In a legal memo to the working group, Shapo said it appeared none its members challenged the actuarial correlation between credit scores and losses and thus there was no basis in current law to propose such a study.
"The working group essentially confronts a question of public policy," Shapo wrote in a memo he submitted before the hearing. "Should a disparate impact study be conducted as a possible basis for recommending future legislation to ban or further restrict the use of credit? This course of action, understood in the context of insurance regulation's predominate policies, would be highly unusual."
Shapo went on to claim that a public policy questioning an actuarially justified underwriting criterion because of its disparate impact would call into question any underwriting criterion with such an unintended effect.
Another legal issue in question was whether the NAIC would be legally able under the Federal Credit Reporting Act (FCRA) to collect the credit information necessary to conduct a study. Industry lobbyists said the proposed study, which would collect credit information of insureds and then conduct a telephone survey to collect demographic information, was methodologically flawed, overly costly and unnecessary.
The Credit Scoring Working Group rounded out its meeting by discussing an information exchange on how the states are working to enforce the credit scoring regulations of some kind that 45 states have passed into law in the last several years.
"These collaborative efforts on existing laws make sense," Shapo said at a media briefing after the hearing. "NAIC supports state efforts in how they enforce the laws already on the books. But the type of study they're looking at ... I don't think it's justified under state insurance laws."
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