While insurance consumer advocates step up their criticism of insurers’ use of credit scores, the American Insurance Association (AIA) and Property Casualty Insurers Association of America testified before a Minnesota Senate committee against legislation that they said would take away an insurance premium discount factor enjoyed by a majority of consumers in that state.
The “credit and insurance scores use regulation,” Senate File 263, would “prohibit an insurer to use credit information, including a credit score, to set rates to reject, cancel, or not renew an automobile or homeowners’ insurance policy or a health plan’s accident and sickness policy,” the bill summary states. The bill also would provide “that the prohibition does not apply to credit information that is directly related to payment history for the type of insurance policy or health plan at issue,” and would make “conforming changes to remove language related to the current usage of credit information.”
“Minnesota consumers have a stable, vibrant insurance market and banning a proven, objective risk factor like credit information will only serve to harm a majority of those same consumers,” said David Snyder, AIA vice president and associate general counsel. “Using credit information as part of the rating or underwriting process helps insurers more accurately assess and price for an individual’s risk, thereby reducing subsidization of bad risks by good ones, making the system fairer for everyone.”
Consumer advocates say the use of credit scores by insurance companies should be more carefully scrutinized, given the fact that consumers’ scores are dropping as lenders tighten credit terms.
“We have already seen credit scores having an impact on interst rates charged to consumers on their credit cards and loans. If insurers continue to use credit scores in determining risk levels, premiums will increase and consuemrs may be forced to reduce the insurance carried to protect their financial assets,” said Karroll Kitt, associate professor at the University of Texas at Austin and a consumer liaison to the National Association of Insurance Commissioners.
Nevertheless, “Existing Minnesota law provides its citizens numerous protections with regard to insurer use of credit, such as prohibiting insurers from rejecting, non-renewing or canceling a policy solely on the basis of a credit score and requiring insurers to exclude so-called ‘no hits’ or ‘thin files’ from consideration,” AIA’s Snyder said.
Alex Hageli, PCI personal lines manager, also testified in support of the use of credit scores, and said, “Insurers consider credit information in their underwriting and pricing decisions for only one reason — to rate and price business with a greater degree of accuracy and certainty. The more accurately companies can price, the better they can compete, and increased competition leads to more choices and lower costs for consumers.”
Hageli cited numerous surveys that affirm the strong relationship between credit-based insurance scores and risk of loss. “Legislation banning this tool would deprive insurers of one of the most predictive underwriting tools at their disposal and would likely result in substantial rate subsidization among lower risk policyholders to offset higher risks,” he said. In addition, he discussed economic trends and the effect on credit scores and insurance scores. “The assumption that credit scores decrease during times of economic hardship is simply not the reality,” Hageli said.
“Minnesota legislators need to understand the value of insurance scoring and how it benefits their constituents,” added Ann Weber, PCI vice president, regional manager and counsel. “Credit information is an accurate predictor of the risk of loss, and insurers need to be able to use this tool in their underwriting and rating practices to ensure individuals’ risks are properly assessed and policyholders are not paying more than they should. Other states, such as North Dakota, Montana, Nebraska, Indiana, Connecticut and Mississippi, have recognized this and have already voted down similar ban bills.”
“Insurers are subject to strict legal standards for all risk classification variables, including credit, and the state of Minnesota has a sound regulatory system that has worked for consumers and insurers. There is no need to take an extreme action that would end up harming an otherwise well functioning market,” Snyder added.
But Brenda Cude, professor of housing and consumer economics at the University of Georgia in Athens, warned that if insurers don’t adjust for the decline in consumers’ scores because of the economic crisis, then consumers and insurers “will be worse off.”
“One outcome will likely be a continued erosion of consumers’ faith in financial institutions,” Cude said.
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