Mass. Bans Credit Scores in Both Rating, Underwriting in New Auto Plan

By | October 9, 2007

Auto insurers in Massachusetts will not be able to use credit scores to price or underwrite risks when the state enters its managed competition market next April.

Insurance Commissioner Nonnie Burnes sided with consumer groups, Attorney General Martha Coakley and a few domestic insurers in banning the use of credit scores in her final regulation which will guide before insurers in filing their 2008 private passenger auto insurance rates with the insurance department for review.

The first draft of regulations for the new system banned insurers from using credit scores for a year in pricing but was silent on their use in underwriting or in deciding whether to accept a driver.

The final regulation not only adds underwriting to the prohibition list but also extends the ban on credit scores indefinitely.

Burnes has said she wants to study the issue of credit scoring and whether it should be banned or regulated in more depth.

“I have said all along that we would be listening hard to public input and we have responded appropriately to the concerns people raised about using credit history in rating and underwriting,” said Burnes. “We need to better understand how credit information in rating and underwriting affects all lines of insurance and determine whether or not its regulated use is in consumers’ best interests. Prohibiting it in the auto market will give us the time we need to assess its impact across the board and come up with the right solution for Massachusetts consumers.”

Many insurers would have preferred that the state allow credit scoring but are just happy that the state is at least moving from its heavily-regulated system to one with more freedom to price and underwrite.

“While we are disappointed in the commissioner’s decision to ban the use of credit information in insurance underwriting and rating,” said Frank O’Brien, vice president and regional manager for Property Casualty Insurers Association of America (PCI), “we are encouraged by the commissioner’s announcement that the Division of Insurance will comprehensively examine the issue.”

Credit scoring is just one of the factors that will be banned. State laws and regulations already prohibit the use of other socio-economic factors such as marital status, education, homeownership, income, race or gender.

In managing the move to a more competitive system, Burnes has said she wants to assure that rates are fair to consumers and that the state maintains a small residual market and a low number of uninsured drivers.

Burnes said her regulation preserves existing subsidies for urban drivers during the first year, facilitates comparison shopping for consumers, and sets forth procedures for her to reject “excessive” and discriminatory rates.

The move brings the state in line with every other state that allows competitive rates.

“Commissioner Burnes continues to blaze a sorely needed path to reform and competition for auto insurance buyers in Massachusetts,” commented PCI’s O’Brien.

He said he agreed with Burnes that the state needs a “healthy, robust and flexible auto insurance market in which insurers are encouraged to be innovative in the products and services that they offer.”

Burnes had used similar language to explain why she rejected suggestions that her regulation simply list the rating and underwriting factors insurers can employ, rather than cite ones they can’t.

“The question we asked ourselves throughout this process is how to provide consumers with as much choice, as many benefits and as much protection as possible,” said Burnes. “I believe this final regulation provides the long overdue answer that good drivers across Massachusetts have been looking for.”

Except for the expanded ban on credit scoring, the final regulation closely tracks with the original draft. Burnes promised to issue further explanatory bulletins as questions and issues arise.

The plan calls for a one-year transition from April 1, 2008 through March 31, 2009.

The final regulation requires companies issuing policies between April 1, 2008 and April 30, 2008 to file their rate proposals with the state by Nov. 19, 2007. Companies issuing policies on or after May 1, 2008, can submit their rates any time after Feb.15, 2008.

Burnes expects that consumers will be able to start shopping for automobile insurance in late winter. The insurance division has already begun holding twice weekly meetings with consumers, producers and the industry on various subjects related to the implementation of managed competition.

In summary, the regulation guiding the transition from fix-and-established rates to managed competition:

• Prohibits rating on the basis of sex, marital status, race, creed, national origin, religion, occupation, income, education, homeownership, credit information or age, except to produce the reduction in rates for drivers age 65 years or older as required by law.

• Prohibits underwriting on the basis of sex, marital status, race, creed, national origin, religion, age, occupation, income, principal place of garaging of the vehicle, education, homeownership and credit information.

• Prohibits insurers from using drivers’ accidents or violations that are more than six years old to raise premiums.

• Preserves the 2007 subsidies across territories to protect urban drivers for policies with effective dates in the transition year.

• Preserves other provisions that benefit urban drivers, such as the low mileage discount for annual mileage under 5,000.

• Requires companies to file forms that describe the overall percentage change from the 2007 premium on certain policy profiles to facilitate competitive shopping by consumers.

• Mandates consumer disclosures regarding coverage options and requires insurance companies to provide coverage and price information on their websites or by telephone.

• Establishes procedures for the commissioner to disapprove rates that are excessive, inadequate or unfairly discriminatory.

• Establishes procedures for the commissioner to suspend rates that are in effect, if necessary.

The regulation requires the following filing dates:

• Auto Insurers Bureau’s (the industry’s rating agency) transitional advisory filing due by Oct. 22, 2007

• Residual market transition rate filing due by Oct. 24, 2007

• All voluntary market transition rate filings for companies that will be issuing policies between April 1, 2008 and April 30, 2008 due by Nov. 19, 2007

• Any company that will be issuing policies on or after May 1, 2008 may make a voluntary market transition rate filing any time after Feb. 15, 2008.

Source: Massachusetts Division of Insurance
Final draft regulation:
http://www.mass.gov/Eoca/docs/doi/Legal_Hearings/211_79.pdf

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