PCI Says Proposed Credit Score Ban Would Further Disrupt Mass. Market

March 9, 2004

The Property Casualty Insurers Association of America notes that Senate Bill 2093, which seeks a total ban on the use of credit-based insurance scores in auto and homeowners insurance ratemaking, would create even more stress for the already troubled insurance market in Massachusetts.

The bill is scheduled for a hearing before the Massachusetts Joint Committee on Insurance today. Frank O’Brien, PCI vice president and New England regional manager, indicated that its sponsor “is trying to stir emotions by promising a ‘raucous setting’ for Tuesday’s hearing.”

“We know the Insurance Committee will ignore such grandstanding, listen to the facts, and consider the real impact that a ban on the use of credit-based insurance scores will have on an already stressed marketplace,” O’Brien added.

He said most states that have debated the issue have decided to regulate the use of insurance scores, but have not banned the practice. Only Maryland took the drastic step of banning the use of insurance scores for homeowners insurance and media reports following the ban indicated that homeowners who had received discounts because of good insurance scores were facing double-digit rate increases as insurers adjusted rates to meet the requirements of the ban.

Congress recently looked at the issue and continued to allow the use of insurance scores as part the Fair and Accurate Credit Transactions Act of 2003 (FACT).

“It is important to note that there are significant differences between the scores used in insurance rating and underwriting and those used in determining the amount, availability and/or price of credit products that lending institutions will make available,” O’Brien continued. “The most significant of these differences is that insurance scoring models do not include or evaluate an applicant’s income, while models used for lending purposes do use income. Those who have attacked the use of insurance scoring are either unaware of, or have chosen to deliberately ignore this key difference.

“In addition, the Committee should be aware that current Massachusetts law expressly permits credit bureaus and other agencies that compile credit information to make such credit information available to others for use ‘in connection with the underwriting of insurance involving the consumer.’ Thus, the General Court has already made the policy judgment that the use of credit information, including insurance score based on such credit information, is reasonable and appropriate in the insurance sales process. No evidence has been presented that warrants reversing or revising that legislative judgment.

“More significantly, every serious and reputable actuarial study of insurance scoring has reached the same conclusion: there is a very high correlation between insurance scores and the likelihood of filing claims in the future. To ignore this powerful evidence by banning the use of the most up-to-date, fact-based tool available for insurance rating and underwriting is to foster a policy of good risks subsidizing bad risks. We believe that would be an unwise, unfair and unsound policy choice.”

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