A Consumer View on Loss-History Databases

Article

Thanks to the leadership of Commissioner Jim Poolman, North Dakota insurance consumers now have common-sense protections against unfair underwriting and rating actions by insurers because of information in loss history databases, such as the Claims Loss Underwriting Exchange and Automated Property Loss Underwriting System.

While the consumer protection provisions of North Dakota s law are just common sense, the legislation represents–incredibly–a quantum leap from the current situation in every other state where consumers are routinely victims of unfair practices by insurers based on information in a claims database.

What are the provisions of the North Dakota bill that have sent the insurance industry into hysterics?

An insurer cannot use a consumer’s inquiry about her policy or coverage as a claim against the consumer;

An insurer cannot use a claim settled without payment against a consumer;

An insurer cannot use a wind or hail claim against a consumer unless it is the second such claim within five years or unless the insurer can demonstrate the consumer failed to maintain the property and the failure contributed to the loss;

An insurer cannot use the claim history of a property not previously owned by the consumer unless the insurer can demonstrate the previous owner did not repair the damage.

Most readers–at least those who don’t work for insurers–will look at this list and ask why an insurer should be able to use any catastrophe claim against a consumer. After all, why should a consumer be penalized for being the victim of a catastrophic weather event?

For most readers, the most remarkable aspect of the law is the knowledge that insurers were actually engaged in the prohibited practices. Yes, insurers were surcharging and denying coverage because of a consumer inquiry about his coverage. Yes, insurers were denying coverage to a consumer purchasing a home because of prior claims on the property without any inspection by the insurer to determine if the property was or was not in insurable condition. Yes, insurers were surcharging and denying coverage because of not-at-fault, catastrophe claims.

What is even more remarkable is the absence of legislative and regulatory action in almost every state to stop these abusive practices by insurers.

This is clearly an area for the National Association of Insurance Commissioners to take action by quickly developing a model law based on the North Dakota statute. The development of such a model should be a no-brainer for the NAIC because such a model would respond to an urgent consumer protection issue and promote uniformity across the states.

We can only hope that the NAIC does a better job with loss-history databases than it has done with credit scoring. As with credit scoring, the National Conference of Insurance Legislators is developing a claims-history database model that provides no consumer protection and allows insurers to continue abusive practices. When the NAIC failed to come up with its own credit scoring model, the industry-friendly NCOIL model was the only option before most state legislators.

The NAIC must not repeat the credit scoring debacle with loss-history databases. If the NAIC’s claim that its No. 1 mission is to protect insurance consumers has any meaning, the group must develop a strong loss-history database model law that contains at least the same protections as the North Dakota law.

But the NAIC and state insurance regulators shouldn’t stop there. Insurers are obtaining all sorts of consumer information and will only increase the amount of information in the future. Already, insurers are seeking to obtain information from automobile black boxes about consumer driving practices and using voice analysis software to determine when consumers are “truthful” or not.

What’s needed is a different approach to regulating what types of information insurers can use for underwriting, rating and claims settlement. Instead of allowing insurers to use any and all types of information in any way they please until a regulator, consumer or legislator happens to discover an abusive practice, the new approach should be to allow the use of new information–new risk classifications–only with prior approval of the insurance regulator.

The NAIC needs to pull its collective head out of the sand on this issue. Developing a model law to regulate insurers’ use of loss history information is an essential start.

Birny Birnbaum is executive director of the Austin, Texas-based Center for Economic Justice, a nonprofit that advocates on behalf of low-income and minority consumers on insurance, credit and utility matters. Birnbaum served as associate commissioner for policy and research and chief economist at the Texas Department of Insurance.

Topics Carriers Profit Loss Claims Property

Was this article valuable?