With the 2008 legislative sessions now in full swing, many states are taking another look at the issue of insurers using credit scoring to underwrite or rate auto or homeowners insurance. Insurance trade groups are stepping up efforts in state capitols to kill pending legislation that would ban the use of credit scoring. However, in Wisconsin, the march is still on with passage of Senate Bill 259 by the Wisconsin Senate on Jan. 31.
In essence the Wisconsin Senate Bill 259 would forbid insurers from considering information in an individual’s credit report for issuing, renewing or setting premiums for auto or homeowner’s insurance. It also prohibits a rating plan for motor vehicle or property insurance from using information in an individual’s credit report as a rating factor.
Insurers Support Use of Credit
According to the American Insurance Association (AIA), the bill passed on a vote of 17-15 with one senator abstaining. Originally Senate Bill 259 was listed to be heard third on the agenda, but the bill was delayed numerous times and eventually discussed during a very spirited floor debate with comments by numerous senators on both sides of the issue. A request was made to send the bill back to the Senate Committee on Health, Human Services, Insurance and Job Creation for further consideration and industry input, but that vote failed. A final roll call vote then was immediately called and the bill squeaked passed the chamber.
The AIA said the that passage of this bill would be “bad public policy” and that, if eventually passed by the General Assembly and enacted, will hurt a majority of Wisconsin consumers.”
Another insurance trade group has concerns, but remains optimistic.
The Property Casualty Insurers Association of America (PCI) expressed disappointment that legislation banning insurers use of credit information passed the Wisconsin Senate, but remains optimistic that the consumer benefits of this rating and underwriting tool will be preserved.
“This legislation didn’t have overwhelming support in the Senate and we are confident that the House will reject the notion of raising rates for the majority of consumers,” Greg LaCost, assistant vice president and regional manager for PCI, told the Milwaukee Sentinel after the vote. “Insurers want to be able to use the most accurate underwriting and rating tools available. However, banning credit information would leave insurers with less predictive tools to analyze the risks. As a result, many lower risk consumers may not be identified and pay more for insurance. Wisconsin lawmakers are well known for looking out for the consumers’ best interest and we believe they will ultimately support maintaining the current system.”
To date eight states have introduced legislation to ban the use of credit. These states are Arizona, Colorado, Kentucky, Nebraska , New Jersey, Washington, West Virginia and Wisconsin.
“Each year several states consider banning credit information,” said Alex Hageli, manager personal lines for PCI. “Since nearly half the states adopted legislation or regulation based in part on the National Conference of Insurance Legislators’ (NCOIL) model act, this issue has become much less contentious. Additionally, Oregon voters rejected a credit ban in November 2006. While we suspect some of the renewed attention to the issue is related to the sub-prime lending crisis, we are confident that public policymakers will see the value of risk-based pricing and recognize it is the fairest process to use for insurance underwriting and rating.”
The National Association of Mutual Insurance Companies (NAMIC), based in Indianapolis, said that Wisconsin’s ranking as one of the lowest-paying states for auto and homeowners’ insurance will be threatened with the passage of this bill.
“Supporters of this legislation have clearly ignored the multitude of studies showing that credit-based insurance scoring is an objective and actuarially valid tool that enables insurers to better predict the likelihood of future claims and the cost of those claims,” said Robert Detlefsen, NAMIC’s vice president of public policy. “The practice is a major factor in holding down insurance rates for the great majority of Wisconsinites who have good credit histories.”
Agents: Another Perspective
The Wisconsin bill is expected to be debated again on the floor of the General Assembly and faces a tougher battle to be approved according to some including the Professional Insurance Agents of Wisconsin who have been monitoring the bill with a different perspective.
“Our concern is that while companies have developed this method for determining rates, agents are on the front line and are in an awkward position because the insured has suffered a rate increase because of a credit score. The agent has to look that customer in the eye and explain it to them,” said Ron Von Haden, executive vice president for the Professional Insurance Agents of Wisconsin.
However in Colorado, where a bill to ban credit was recently defeated the agents support the use of credit.
“We are pleased it was defeated, but we know the battle is not over,” said Barbara Fidler, executive vice president of the Professional Independent Insurance Agents of Colorado. “We’ll continue to be on the watch for these kinds of bills.”
Fidler told Insurance Journal’s Julie Lake that the elimination of credit scoring for insurance purposes has been the subject of numerous legislative bills in Colorado.
“Historically, the real estate industry was pushing it,” said Fidler. “A few years ago we worked with them to educate them and they’ve stopped. But that history eventually became the flag lawmakers continued to carry based on consumer complaints and sometimes their own experience. Most recently the “D” word — discriminatory — has entered the discussion.”
Fidler dismisses those charges of unfairness, characterizing credit scoring as an important underwriting tool. “Credit scoring is a tool that helps insurers assess the risk and set the premium,” said Fidler. “We do not believe it’s discriminatory. It does not select races, it selects on your credit management. We believe the data shows that everyone starts out on a level playing field. Everyone has the same opportunity.” Fidler added that credit scoring is just one of many criteria that insurers use to underwrite a customer. “In Colorado, insurance is not solely rated on credit scoring,” said Fidler. “We have laws to prohibit that.”
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