Two national insurance company trade organizations have expressed legal concerns about the recently initiated multi-state study on credit-based insurance scores and have asked regulators in eight states to withdraw their data requests.
The insurers’ concerns were detailed in a strongly-worded letter sent to commissioners by Nat Shapo, the attorney retained by the Property Casualty Insurers Association of America (PCI) and the National Association of Mutual Insurance Companies (NAMIC), to represent the organizations in this effort. Shapo, the former insurance director of Illinois, is a partner in the Chicago office of Sonnenschein Nath and Rosenthal.
The letter was sent in early June to commissioners in Oregon, Alabama, Washington, Nevada, Montana, Indiana, and Missouri. On June 18 the Alabama Insurance Department notified insurers that it was withdrawing from the study.
The letter identifies two significant areas of concern regarding the study: 1) the use of regulatory examination powers for research on public policy issues; and 2) the possible violation of anti-discrimination provisions of existing insurance laws.
Shapo stated that “the explanatory letter accompanying the recent data call makes it clear that the primary purpose of the study is not to verify compliance with existing law. PCI and NAMIC believe that information gleaned from market conduct examinations should only be used to determine compliance with existing law, not as the basis for developing new laws.”
PCI and NAMIC contend that state laws grant regulators the power to demand information from insurers for the purpose of enforcing existing provisions of the insurance code, not for deriving information which has no relevance to established statutes and regulations.
The letter also states that “the use of examination powers for research purposes are particularly acute due to [PCI and NAMIC's] recent experience in Missouri, which is designated by the participating states in the study as the lead state. Insurers objected to the methodology used in a Missouri [conducted earlier this year]…and view this as a template for the current study and thus approach this process with great trepidation.”
The Shapo letter also pointed out that it appeared that if the study found that the use of credit information leads to “an unintentional but disproportionate impact on an identifiable class of consumers,” commissioners may seek to enforce an anti-discrimination provision of the existing insurance code. “PCI and NAMIC firmly believe that the concept of disparate impact is not relevant to state insurance laws. In fact, as the NAIC has unambiguously argued, application of a disparate impact standard is inherently in conflict with the established definition and interpretations of ‘unfair discrimination’ in statutes and case law,” Shapo wrote.
Shapo cited an NAIC amicus brief in Nationwide v. Cisneros that stated: “The assertion of claims…especially under the so-called ‘disparate impact’ approach, which requires no showing of discriminatory intent, makes impossible the operation of state laws establishing insurers’ right to use rationally based, neutral risk selection techniques.”
“We have been working with state legislators and regulators for the past five years to enact laws that allow insurers to use this important underwriting tool and that establish fair and reasonable consumer protections,” said Neil Alldredge, director of state affairs for NAMIC. “Dozens of state legislatures have considered this issue and have passed laws that meet these goals. We believe that this study is not a fair and appropriate exercise of regulatory authority and have asked regulators in these states to consider withdrawing their requests. We are pleased to see that the Alabama Insurance Department withdrew from the study and hope other state insurance regulators will follow suit.”
“Last year Congress made permanent the provisions of the Fair Credit Reporting Act – the federal law that for more than 30 years has permitted insurers to use credit history to underwrite automobile and homeowners insurance policies,” said Robert Zeman, senior vice president, insurance and regulatory affairs for PCI. “Congress also called for the FTC and the Federal Reserve to conduct a broad national study on the impact – positive and negative – of the use of credit scores and credit-based insurance scores on all facets of consumers’ lives – housing, employment, access to mortgages and other loans, and insurance. We think it makes more sense for state regulators to work closely with the FTC on this effort than to conduct a study only on credit-based insurance scores that collects data from a few states.”
The federal study is due to be completed by the end of 2005.