Delaware Senate Panel Weighs Pros and Cons of Ban on Insurers’ Use of Credit Scoring

March 16, 2005

Delaware Insurance Commissioner Matt Denn urged the Senate Insurance and Elections Committee to pass Senate Bill 2, which would prohibit the use of credit scoring in auto and homeowners insurance policies in Delaware. Denn told the committee that credit scoring is unfair and unnecessary, and told the committee that the state’s existing credit scoring regulation is “so full of loopholes and unenforceable provisions that it is practically meaningless.” He also warned of the risk that the private credit information would be disclosed.

Insurers, on the other hand, opposed the measure to ban the use of credit scoring, claiming the consequences of disallowing insurer use of credit reports would include higher prices for most consumers.

“Credit history allows insurers to write business they may not have accepted in the past, and to offer lower rates to many consumers. Most consumers have good credit and benefit with lower premiums than higher-risk individuals,” said Richard Stokes, regional manager for the Property Casualty Insurers Association of America (PCI).

PCI members provide almost 40 percent of Delaware’s private passenger auto and more than 27 percent of the state’s homeowners’ insurance coverage.

But Denn listed several reasons for the passage of Senate Bill 2. He maintained that credit scores are often inaccurate, citing a Consumer Reports study showing errors in about half of individuals’ credit reports. “How can we allow a process with an error rate of up to 50 percent to be used for determining what we pay for auto and homeowners insurance?” he asked.

Denn also warned that the use of credit scoring would increase the odds that Delawareans’ private financial information would be improperly disclosed. “If we learned nothing else from Choicepoint’s accidental disclosure of thousands of Americans’ private financial information a couple of weeks ago, we learned that national credit agencies are not able to properly secure our credit information,” he said.

He told the Senate committee that credit scoring “victimizes those who are already least able to afford insurance,” by increasing the cost of insurance for those who are already having the most difficulty paying their bills. Denn maintained that independent studies of credit scoring have demonstrated that it has a disproportionate impact on poor and minority policyholders.

Finally, Denn testified that credit scoring is unnecessary because insurance carriers already know how to properly set premiums without using it, as they do so in some of the largest insurance markets in the country.

Denn rejected insurance carriers’ arguments that they should be permitted to use credit scoring because it is a good predictor of an individual’s claim history. “Even if credit scoring were accurate in theory,” Denn said, “the fact that it relies on frequently bad information, the fact that it jeopardizes Delawareans’ privacy, the fact that it victimizes the economically disadvantaged, and the fact that it is discriminatory, makes it wrong.”

PCI’s 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,” Stokes said. “They measure how, not how much.”

He maintained that s recent study conducted by the Texas Department of Insurance (TDI) 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, Stokes said. The regulation prohibits use of credit information as the sole basis for an adverse decision, and limits certain credit information from consideration. In fact, he claimed, the Delaware regulation is more restrictive than similar rules in almost half the states.

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

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