The reported increasing popularity of the National Conference of Insurance Legislators (NCOIL) Insurance Scoring Model Act and the publication of two significant studies showing an irrefutable link between credit-based insurance scores and risk of loss have apparently helped to mitigate many objections to the use of such scores and to preserve the ability of insurers to use this important rating and underwriting tool.
“The most significant development in the insurance scoring debate in 2003 has been the legislative support given to the NCOIL model act,” said Robert Zeman, senior vice president of state government affairs for the National Association of Independent Insurers (NAII).
Increasingly, state legislators and insurance regulators across the country are reportedly using the NCOIL model as a way to respond to consumer concerns and implement reasonable regulation of insurance scores.
On July 7, Louisiana became the 12th state this year to enact legislation that is based on the provisions of the NCOIL model. Illinois is reportedly likely to join the states that have enacted NCOIL-type legislation as it has a bill awaiting the governor’s signature. In addition, insurance commissioners in Alabama and Wyoming are considering regulations that incorporate the NCOIL approach to insurance scores.
Over 40 states considered insurance scoring legislation in 2003. To date, laws have been enacted in 17 states. States enacting legislation based on the NCOIL model include Arkansas, Florida, Georgia, Indiana, Kansas, Louisiana, Maine, Nebraska, Nevada, North Dakota, Oklahoma and Texas.
“There was a marked difference in the tenor of the insurance scoring debate this year and we expect to see the trend toward moderation to continue. The NCOIL model served as a viable starting point for discussion and compromise as it offered lawmakers an alternative to legislative bans. While pockets of staunch opposition persist, the major developments of this year provide ample support for the use of this highly predictive tool,” said Zeman.
The NCOIL approach permits insurers to use insurance scores and provides strong consumer protections. The model, which according to the National Association of Independent Insurers (NAII) must be tailored to fit the needs insurers in each individual state, prohibits insurers from using credit information as the sole basis for denying, canceling or non-renewing a policy or increasing rates. The model provides insurers with three options regarding the treatment of consumers with very little or no credit history. This information can be used if the insurer is able to demonstrate to the insurance commissioner that the absence of credit information is related to risk of loss.
The model also contains a provision requiring insurers to file their scoring models with state regulators. Such filings are considered trade secrets.
At the annual renewal of a policy, a consumer has the right to request that the insurer re-write his or her insurance policy based on the consumer’s current insurance score, unless the insurer treats the consumer in a manner as otherwise approved by the commissioner. An insurer that takes an adverse action based on credit information must provide the consumer with reasons for the adverse action.
Six states – Alaska, Arizona, Colorado, North Carolina, Virginia, and Wyoming – passed bills that deviated from the NCOIL model.
Of these states only Alaska and Virginia passed legislation that is more restrictive than the NCOIL model. The Alaska legislation prohibits certain credit factors from being used to calculate an insurance score. These include credit history affected by a joint account with a former spouse, and credit history that was obtained more than 90 days before the policy is issued. Virginia reached a compromise that prohibits the use of credit information as the sole reason for an underwriting or rating decision. The measure also requires that credit information can only be used if it is derived within 90 days for new business and 120 days for non-renewals.
Arizona’s new law addresses notification of consumers regarding adverse action and places several restrictions on the use of certain factors in developing an insurance score. The Colorado statute contains many of the notice and disclosure provisions of the current regulation on the use of insurance scores in the state. North Carolina passed legislation prohibiting insurers from using insurance scoring as the sole basis for canceling a policy, however it may be used as the sole basis for discounting rates. Wyoming passed legislation that allows the insurance commissioner to adopt insurance scoring rules.
Another major development involving insurance scoring this year was the release of two major studies confirming the connection between an individual’s credit-based insurance score and his or her propensity for loss.
At the request of the Texas Legislature, the University of Texas studied the issue and reported that there is a very strong correlation between not only credit history and the frequency of loss, but also the severity of loss. This independent academic study reinforced insurance industry findings regarding the predictive nature of insurance scores.
In June, EPIC Actuaries, LLC released results of the largest and most comprehensive study ever undertaken on correlation, which found an unquestionable connection between insurance scores and likelihood for loss.
“This study also demonstrated that insurance scores are among the three most important rating variables used by insurers. These studies highlight the accuracy of the tool and its usefulness in helping to ensure that the price of insurance more closely corresponds to the consumer’s risk of loss,” continued Zeman.
The insurance scoring issue remains on the agenda of several state legislatures. California lawmakers were schedule to consider a bill to ban the use of insurance scores to underwrite homeowners insurance on July 9. A bill to restrict the use of such scores is also pending in the Oregon legislature. The issue may also draw the attention of Congress as federal lawmakers vote on the reauthorization of the federal Fair Credit Reporting Act (FCRA) later this year.
The FCRA, enacted in 1970, governs the use of consumer credit reports and permits the use of this information for insurance underwriting. The FCRA also contains seven specific preemptions to state laws that deal with prescreening activities, affiliate sharing, adverse action notices, consumer rights, procedures by which consumers dispute the accuracy of credit report information and the content of consumer reports that will expire on Dec. 31, 2003.
On June 26, a bill to permanently reauthorize the expiring provisions of the Fair Credit Reporting Act (FCRA) and to help consumers combat identity theft was introduced by a strong bipartisan group of members of the House Financial Services Committee on Financial Institutions. The Bush Administration reportedly strongly supports permanent reauthorization of the expiring provisions and addressing the growing problem of identity theft.
“NAII has taken a lead role in the effort to have Congress reauthorize the expiring provisions. Without these provisions insurers’ use of credit information could be in jeopardy as states would be open to impose a broad range of conflicting and overly burdensome restrictions on the use of credit information,” added Zeman.