Insurers' Use of Credit Scores Faces Renewed Scrutiny by Regulators

March 17, 2009

The National Association of Insurance Commissioners (NAIC) has adopted a proposal to review the use of credit-based insurance scoring.

The NAIC said it will convene a public hearing to take testimony on how the insurance industry uses credit scores, what goes into an insurance credit score and what impact credit scoring has on consumer in today's economy.

"This is a critical issue for the NAIC to consider as part of the 2009 consumer liaison agenda," said New Mexico Insurance Superintendent Morris J. (Mo) Chavez, who chairs the NAIC/Consumer Liaison Committee.

"In this challenging economy, it is essential that insurance regulators have the necessary tools to prevent collapsing credit markets from unfairly impacting consumers."

Proponents for the use of credit-based insurance scores argue that they are predictive of an insured's future claims experience, and are necessary tools for underwriting and/or rating.

Critics argue that the use of credit-based insurance scores unfairly discriminate against lower-income individuals and some protected classes of people and that they have no loss mitigation benefit.

Forty-eight states have taken some form of legislative or regulatory action limiting the use of credit-based insurance scores, including:

Some states have limited the use of credit-based insurance scoring, requiring that it not be the sole rating factor used by insurers to evaluate risk.

Some states believe that the process itself is not intended to be discriminatory, and any disparate impact based on race or ethnicity is merely coincidental.

Some states believe that a majority of policyholders benefit from the use of credit scoring.

Some states have taken issue with the use of credit scores and other rating criteria, such as occupation and education.

Some states prohibit the use of credit-based insurance scores.