PCI: Banning Credit Score Use Will Hurt Del. Consumers

March 16, 2005

A Delaware bill that would ban insurers from using credit history to underwrite auto and homeowner policies would raise prices for most insurance consumers, according to the Property Casualty Insurers Association of America (PCI).

“Credit history allows insurers to write business they may not have accepted in the past, and to offer lower rates to many consumers,” said Richard Stokes, regional manager for the PCI at a Senate hearing Wednesday on S.B. 2. “Most consumers have good credit and benefit with lower premiums than higher-risk individuals.” PCI members provide almost 40 percent of Delaware’s private passenger auto and more than 27 percent of the state’s homeowners’ insurance coverage.

Stokes noted the difference between credit history used by lenders and insurers. While both are derived from information on credit reports, insurers use the information to develop insurance scores to predict the likelihood of future insurance loss; lenders use them to determine the availability, amount and price of credit products offered to consumers, based on the likelihood of repayment. “The most significant difference is that insurers never consider income,” said Stokes. “They measure how, not how much.”

When rating and underwriting, insurers do not consider variables like race, religion, national origin, gender, marital status, sexual orientation, age, address, salary, disability, occupation or employment history.

Federal law has permitted the use of credit history for personal lines coverage for more than 30 years, although the practice has reportedly become more common in recent years as an accurate predictor of risk.

A recent study conducted by the Texas Department of Insurance (TDI) reportedly found that credit information significantly improves pricing accuracy, and that credit-based insurance scoring is a fair and justified tool that adds value to the insurance transaction.

Consumer safeguards regarding credit history use are already on the books in Delaware in the form of Regulation 906, which addresses commissioner approval, prior disclosure to the consumer, use of credit information, and dispute resolution, according to Stokes. The regulation prohibits use of credit information as the sole basis for an adverse decision, and limits certain credit information from consideration. In fact, the Delaware regulation is reportedly more restrictive than the National Conference of Insurance Legislators (NCOIL) model act, which is followed in almost half the states.

S.B. 2’s elimination of credit history will reportedly do nothing to protect Delaware consumers.

“PCI does not oppose reasonable regulation over the use of credit information in personal lines insurance,” added Stokes. “But because safeguards are already in place, banning the practice will do Delaware consumers more harm than good.”

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