Colo. Legislation to Ban Use of Credit Scoring in Underwriting Defeated

Agents, insurers praise legislation’s defeat but say the battle is not over yet

As the issue of credit scoring continues to be the subject of state legislative proposals, insurance agents in Colorado are celebrating the defeat of a bill that would have prohibited property/casualty insurers from using credit information as an underwriting factor for the acceptance, denial, renewal or rating of a potential insured.

The legislation was defeated on a 26 to 39 vote.

“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.”

The use of credit information helps to make the price of insurance better match the risk of loss posed by the consumer and as a result, on average, lower-risk consumers will pay lower premiums, said Property Casualty Insurers Association of America’s Kelly Campbell, regional manager and counsel. “This legislation runs counter to an established body of research which demonstrates that credit-based insurance scores are very closely related to the risk of loss. Studies have found that drivers with the best credit are involved in fewer accidents,” she said.

Discriminatory Allegations

Fidler noted 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 for insurance companies.

“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.”

PCI’s Campbell noted that Colorado already has a law restricting the way insurers use credit information and it contains some of the strongest consumer safeguards in the nation, adding that the Colorado law is in the mainstream of how other states govern the use of credit information.

“When purchasing insurance coverage, consumers simply want a fair price that relates to the risk they represent,” said Campbell. “Credit information along with a variety of other factors, such as years of driving experience, previous crashes and the age of the vehicle, help insurers more accurately gauge the risk characteristics of each consumer.”

As in past years, PIIA of Colorado followed the legislative proposal closely. “We started at the committee level,” said Fidler.

“Our governmental affairs person testified there. When it passed out of committee and went to the floor, we took action. We had agents at the Capitol. They lobbied the lawmakers before they went into the chamber and they watched the debate. We had about 20 agents there, many of our members, plus some agents from Farmers and State Farm.”

Fidler said the agents were pleased when the Colorado House rejected the credit scoring proposal in late January. “Our entire focus is on the outcome for consumers,” she said.

“To have an outright abolishment of credit scoring would adversely affect the majority of insureds because most get a benefit from it. It would also impact those with poor scores because as they overcame their credit issues and improved their scores they would have no opportunity to have better rates.”

Wisconsin’s Battle

Meanwhile, the Wisconsin Senate passed legislation that forbids insurers from considering information in an individual’s credit report for issuing, renewing, or setting premiums for auto or homeowners insurance. It also prohibits a rating plan for motor vehicle or property insurance from using information in an individual’s credit history.

Ron Von Haden, executive vice president of the Professional Insurance Agents of Wisconsin, said his members are closely monitoring Senate Bill 259, but so far have not lobbied lawmakers.

“We have stayed on the sidelines on this one,” said Von Haden, “but we want to make sure the agents are not placed in a more burdensome position than they already are.

“Our concern is not that it’s invalid,” said Von Haden. “We can argue about the validity and develop studies back and forth all day long. 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.”

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 the Professional Insurance Agents of Wisconsin’s Von Haden.

Topics Carriers Legislation Agencies Underwriting Wisconsin Colorado