New Florida Law Limiting Insurers’ Use of Credit Reports Takes Effect

Florida’s Chief Financial Officer Tom Gallagher said that a new state law that went into effect Jan. 1 prohibits insurance companies from using a person’s credit history against them if they are dealing with unexpected medical bills or the death of a spouse. The new law also prohibits insurers from denying coverage or raising rates based solely on a credit report or score.

“When credit history plays a role in a consumer’s ability to obtain and maintain insurance coverage, extenuating circumstances should not be used against them,” Gallagher said.

An increasing number ofinsurers are reportedly using credit information when deciding how much consumers should pay for insurance coverage. Of the top 10 writers of homeowners insurance, half consider credit information in underwriting. Nine of the top 10 writers of automobile insurance also consider credit information in underwriting.

The new law, passed during the 2003 regular legislative session, requires insurance companies to notify an applicant or an insured if their credit report is being requested for underwriting or rating purposes. If credit history played a role in an insurance company’s decision to deny coverage or raise an insured’s rates, insurers must inform the consumer and provide them with a copy of their credit report. If a consumer is ad-versely impacted by the use of a credit report, insurers will have to reevaluate the insured’s credit history every two years.

Insurance companies will also be prohibited from denying coverage or raising an insured’s rates based, in whole or in part, on any of the following factors: the absence of or insufficient credit history, past due medical bills, or place of residence.

William Stander, regional manager for the Property Casualty Insurers Association of America (PCI), commenting on Florida’s Office of Insurance Regulation’s first public draft of the credit rule, noted “the OIR is working on a revision. We’re hoping, of course, that the revision will address some of the issues we raised.

When asked what the industry feels would be fair in relation to the proposed rule, Stander commented, “Much of the draft rule goes beyond the authority delegated by the legislature, and would impose requirements and standards that are unreasonable and have no support in actuarial or underwriting standards of practice. In fact, several of the draft rule’s requirements are simply impossible to meet. And, the sheer volume of requirements is staggering. Intentional or otherwise, the draft rule’s overall effect, especially of that section detailing the requirements for approval of a credit scoring methodology, would be to make the use of credit scoring impossible.”

Stander said specifically, “the draft rule would impose standards far beyond those currently found in F. S. 627.351 or F. S. 627.062, by requiring that an insurer prove a negative. A literal interpretation of these standards, applied to currently approved non-credit variables, might render most or all of them invalid. For example, using motor vehicle records would be difficult if an actuary had to certify that individual tickets did not result in inadequate, excessive, or unfairly discriminatory rates for any subgroup of insureds, despite statistical evidence that people with more tickets have higher losses in total.

“The draft rule would also expand the definition of ‘unfairly discriminatory’ specifically related to the use of credit scoring. This singling out of credit scoring as a rating and underwriting factor was not enumerated by the legislature. The draft rule raises multiple trade secret and confidentiality issues. The draft rule also requires certifications in several sections that are impossible to make, as one simply cannot provide proof of non-overlap for all possible subgroups. Nor can insurers certify that a methodology is not ‘unfairly discriminatory’ to certain subgroups based on race or religion, because insurers do not have nor do they want to collect that type of demographic data.”

According to Stander, to streamline the process, the industry suggests that there be two types of filings for insurers using credit scoring for rating and underwriting; (1) model filings and (2) rate/form filings that use the models that have been reviewed and approved by the OIR. “Otherwise the credit information called for in the draft rule would be required to be filed and reviewed over and over again. Clearly much of the information referred to in the draft rule would only make sense in the context of a rate filing as opposed to a credit scoring model filing,” Stander added.

When asked if the ruling would have any impact on other states, PCI Policy Manager Lynn Knauf said, “other states will not likely be impacted by Florida’s approach to this issue. Several other states have enacted credit scoring legislation intended to allow insurers to use credit scoring in their rating and underwriting decisions – with reasonable conditions to assure that consumers are informed, and not subject to any unfair discrimination. There are only a few states out there that have taken steps to ban the use of credit scoring in some way (California, Hawaii, Maryland). Because Florida’s regulation would potentially make compliance a near-impossibility, other states are unlikely to follow Florida’s direction.”

The bottom line in Florida according to Knauf is “agents are going to be on the front line. If insurers are unable to consider credit, agents are going to have to explain to many customers why their discounts are not as large as they once were. And if companies are unable to use a valid and very predictive underwriting tool, risk selection criteria may change – and agents may see tighter underwriting rules as well. Independent agents may also be disadvantaged in that federal law specifically allows insurers to consider credit information in their marketing efforts. (And this provision cannot be pre-empted by the states.) Since a company can target market to those with good credit records, Florida’s regulation could ultimately result in an unequal playing field for some agents.”