A proposal to ban use of credit-based insurance scores (HB 1292) would do severe harm to, and cause unintended consequences for, Colorado consumers, according to the American Insurance Association (AIA).
“Removing credit information from the insurance rating and underwriting process means people who live up to their commitments and who pay their bills on time may end up paying more than they should. This is unfair,” said Fred Bosse, AIA vice president, Southwest Region. “Credit-based insurance scores are one of several different tools used to differentiate between lower and higher insurance risks, so customers who are better risks pay better rates. The majority of policyholders benefit from the use of insurance scores.”
There is strong legislative and regulatory support for the use of credit-based insurance scores as a way to help insurers more accurately price their products. Colorado already has a comprehensive regulation (5-1-16) in place that includes consumer protections dictating how credit information can be used. Implementing a ban would disconnect Colorado from the mainstream of states, and could end up hurting consumers more than helping them.
The federal Fair Credit Reporting Act was renewed in late 2003 and that law expressly permits the use of credit information in insurance. In addition, the National Conference of Insurance Legislators (NCOIL) passed a model act on credit scoring in November 2002 which protects consumers, addresses the needs of agents and does not artificially impede the ability of insurers to use cost-effective and accurate underwriting tools. As of December 2003, NCOIL reports that 16 states have adopted laws that are either identical or similar to its model. Also, in a November 2002 report to the National Association of Insurance Commissioners (NAIC), a subcommittee of the American Academy of Actuaries found that, “credit history can be used effectively to differentiate between groups of policyholders and therefore it is an effective tool.”
“AIA has worked with legislators and regulators in many states to enact reasonable laws and regulations pertaining to insurance scores. We have met with the sponsors of this legislation and provided information on the benefits of credit-based insurance scores and reasonable approaches to consumer protection, including the NCOIL model legislation,” said Bosse. “It should be noted that a virtual ban on the use of credit in Maryland has had the unintended – but foreseeable and forewarned – effect of hurting consumers. We certainly hope that doesn’t happen to Colorado residents.”