The members of a task force from the Professional Insurance Agents Association of Pennsylvania, Maryland and Delaware recently met with representatives from all three state insurance departments, and urged that rules be adopted to protect policyholders from the increasingly widespread use of “credit scoring.”
Insurance companies now frequently use credit scores to make underwriting decisions. The method is similar to the banking practice of adding or subtracting “points,” based on events like late or on-time payments to rate applicants suitability for loans.
“The practice is built on the assertion that there is a strong correlation between credit history and likelihood of a loss,” stated William E. Liebig, Chairman of the task force. He added that “Unfortunately, as credit scoring use has become widespread in automobile and homeowners insurance, many deficiencies and questions have surfaced, including how credit scoring practices are regulated.”
Focusing on the marketplace from an independent agent’s perspective in serving policyholder needs, the task force examined steps that should be taken to assure that practices are fair and balanced. It concluded that certain actions should be considered to protect policyholders and
recommended the following:
— Asking lawmakers to prohibit the use of credit scoring as the sole factor in underwriting insurance.
— Asking companies to provide full disclosure when they use credit scoring in underwriting.[And to disclose any surcharge due to a poor credit score on the policy itself]
— Suggesting that, when a credit score raises premiums, that the credit score be automatically rerun every year to see if a consumer qualifies for a better rate.
— Educate both agents and consumers about credit scoring.
“Our members are telling us that the three quarters of their automobile and homeowners policies are being written today using credit scoring,” Liebig stated. “It’s unfair both to consumers and to agents to allow the current situation to continue to exist.”
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