A Massachusetts independent agents group said it is confident that banning auto insurers’ use of credit scores and other socioeconomic factors will become a state law in coming months.
The Massachusetts Association of Insurance Agents (MAIA) said it is preparing 1,400 member agencies to start gathering some 69,000 signatures from registered voters to put this question on the 2012 state ballot. In September, Attorney General Martha Coakley certified the initiative petition.
Massachusetts is in fact already one of a few states with strict policies on the use of credit scores and other socioeconomic factors. In Massachusetts, regulators will not approve rate filings for auto or homeowners insurance that include the use of credit scoring. But supporters of the ban say it needs to be signed into law so that the regulation will stay in place even when a different administration comes in.
Only one state, Hawaii, has a law that bans the use of credit reports for auto insurance underwriting and rating, according to the Insurance Information Institute. In California, the use of credit is not permitted under Proposition 103 for rating auto policies unless specifically allowed by the regulator.
In Washington State, a law passed in March 2002 prohibits cancellations after 60 days and non-renewals based on credit history. Maryland, which had previously allowed the use of information from credit histories, bans the use of credit in homeowners policies and in auto insurance underwriting decisions on existing business. And while credit-related information can be used in rating decisions about new policies, the law imposes a cap on discounts and surcharges related to credit.
Additionally, 26 states have adopted laws or regulations based on a model law by the National Conference of Insurance Legislators (NCOIL), according to the Property Casualty Insurers Association of America.
The model law requires insurers to disclose to consumers that a credit report may be used and to notify the policyholder in compliance with the Fair Credit Reporting Act when credit is the basis for an adverse action. It prohibits the use of credit information as the sole basis for refusal to insure, to non-renew or cancel.
It also bars the use of disputed data or information identified as medical collection accounts in the credit report. And it encourages insurers to take into account extraordinary life events, such as catastrophic illness or the death of a spouse.
Massachusetts Agencies Mobilized
“We are going forward with gathering of our signatures,” MAIA President Frank Mancini told Insurance Journal. The group is utilizing member agents throughout the state to assist in gathering signatures. “We have 1,400 member agencies all over the state. So that’s going to be our army of signature gatherers,” he said.
In addition to the state ballot, MAIA is also pursing a legislative track that would reach the same result as the ballot question. The group is working with like-minded state legislators to pass a law with similar prohibitions. Mancini said, “So we are moving on this issue on two tracks, the ballot question track and the legislative track.” If successful, the legislative track could actually reach the intended goal earlier than the state ballot effort.
Also Legislative Track
A hearing on a legislative bill has been scheduled for Oct. 8. “We have about a third of the whole legislature, the house and the senate combined, already co-sponsoring the bill. This issue has a great deal of support.”
“In our opinion, the use of credit, education, the occupation in the rating and underwriting of auto insurance is unfair and discriminatory,” MAIA President Mancini said. “Those socioeconomic factors — credit, education, occupation — have nothing to do with the way people drive. This is not a new position. We’ve said for many years that a person’s auto insurance rate should be based primarily on their driving records and their driving experience,” he said.
While most states do allow some use of credit and socioeconomic factors by auto insurers, “these factors, particularly credit, have been questioned. And I know that in U.S. Congress, before getting involved in all the economic problems in the past few years, lawmakers were looking at possible legislation to prohibit the use of credit.”
Why Insurers Consider Credit Factors
However, insurers and actuarial studies have shown a consistent link between low credit scores and auto insurance claims. According to the Insurance Information Institute, actuarial studies have shown that how a person manages his or her financial affairs is a good predictor of insurance claims. The Institute says many people have no idea they are beneficiaries of credit-based insurance scoring. More than 50 percent of policyholders get a lower premium because of good credit.
Many insurers seem to agree. Insurer Nationwide states that it uses a credit-based insurance score when determining premiums. The score examines payment history to see if there are delinquencies or late payments, length of time of credit history and types of credit. The company currently does not offer auto insurance coverage in Massachusetts.
Nationwide states that studies show incorporating a credit-based score and credit history.allows the company to better predict insurance losses. Other rating factors in addition to credit that influence auto insurance premium include: age or driving experience; how the vehicle is used; driving and claims history; make and model of the vehicle; and geographic location. According to Hartford, Conn.-based insurance research firm Conning & Co., more than 90 percent of all insurers use credit information when determining premiums.
Insurer Group: ‘Unnecessary, Redundant’
Meanwhile, the Massachusetts Insurance Federation (MIF) is calling MAIA’s effort to place a referendum question on the 2012 state ballot “unnecessary, redundant and completely without merit.” MIF is the trade association representing a majority of the companies writing auto insurance in Massachusetts.
“As a regulatory matter, the insurance commissioner already bans the use of credit scores and other underwriting factors commonly used in other states,” said James Harrington, executive director. “But the Massachusetts Association of Insurance Agents wants a statutory ‘Do Not Enter’ sign that sends the message to the industry nationally that Massachusetts is hostile to competition.”
Credit Scores Could Suffer When Unemployed
MAIA President Mancini is adamant that his group is on the right side of the argument. “Just because someone has a credit score that might be below a certain level, I don’t think their premium rates should be increased because of that.” And what if someone gets laid off in this economic downturn and suffers a falling credit score? “Should that person pay more for their auto insurance because they are unemployed through no fault of their own? I don’t think so.”
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