The West Virginia Department of Insurance’s informational letter addressing credit-based insurance scoring in personal lines would severely restrict the use of a proven underwriting and rating tool, according to the National Association of Independent Insurers (NAII).
“Insurance scores help make insurance underwriting more objective and consistent, and restrictions on the use of insurance scores should be approached with great caution,” NAII Counsel Robert Hurns wrote in a letter dated Aug. 28 to West Virginia Commissioner Jane Cline, commenting on the department’s Informational Letter 142.
“NAII urges the department to modify the language of the information letter topreserve the use of insurance scores in underwriting and rating,” Hurns added.
NAII, which represents 33 percent of all personal automobile coverage and 32 percent of all homeowners’ coverage written in West Virginia, is encouraged that the department lifted the moratorium on filings containing insurance scoring. However, NAII remains concerned over the current form of Information Letter 142 and recommends the department modify Sections 1, 3, 7 and 13 in the document:
• Section 1 requires that an insurer, rating organization or credit model provider test, certify and retain evidence available to the insurance department upon request to demonstrate that the insurance scoring model does not unfairly discriminate against its policyholders. This section implies that insurance scores discriminate against low-income consumer and minorities, but it is a charge not backed up by facts, NAII states. Rather, insurance scores only consider a person’s credit experience, not income, address, race, ethnic group, religion, gender, family status, disability, nationality, age or marital status.
• Section 3 provides that the insurer, rating organization or model provider maintain and use random testing procedures for auditing the accuracy of an insurance score assignment. It also states that if an inaccuracy is discovered, affected scores must be re-run and the insurer must re-evaluate those risks based on the corrected score, refunding any difference in premium overpayments. Many NAII companies are not sure what this section would actually require, and request clarification. NAII also believes the consumer is in the best position to discover inaccurate information and request an investigation.
• Section 7 mandates that if an insurer is unable to obtain sufficient information to produce an accurate insurance score for a policyholder – classified as a “no hit”- the insurer must exclude the use of credit as a factor and rely on traditional underwriting criteria. According to NAII, no two companies treat “no-hits” in the same manner because of the highly competitive nature of the insurance industry. Compelling evidence exists that “no-hits” tend to present a higher amount of risk. As a result, some companies believe “no-hits” should be considered a strong risk-indicator, and other companies believe “no-hits” should be treated neutral unless statistical evidence proves otherwise. NAII requests that an insurer’s ability to assign individuals to a level of risk that reflects actuarial/statistical evidence be preserved.
• Section 13 states that an insurance company shall recheck the insurance scores of policyholders annually before renewal to determine if the policyholder’s insurance score has changed. NAII believes most companies use different criteria for underwriting renewals, rather than for new business. Companies initially use insurance scores to learn about an unknown quantity. However, some insurers do not use credit information for renewals and instead examine actual payment history, loss history and other factors, according to NAII. The mandate in this section does not add value, but will add costs, which consumers may have to absorb in the long run. Also, NAII suggests that in the least this provision have a less stringent time period for re-evaluation, such as three to four years, rather than one year.
“Severely restricting an important underwriting tool will only exacerbate a growing insurance affordability and availability problem in the state,” Hurns said. “Insurance companies enter a market when they can underwrite and make a profit. Hindering the use of a critical underwriting mechanism will only create more of a disincentive for insurance companies to enter or stay in the West Virginia market.
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