Better education for legislators, insurance agents and policyholders regarding the benefits of the use of insurance credit scoring in underwriting and rating for personal lines is a critical goal for the insurance industry, according to the National Association of Independent Insurers (NAII).
NAII senior vice president, State Government Affairs Robert Zeman said that allowing use of insurance credit scoring is good public policy because, as a highly valid predictor of losses, it prevents unfair subsidies and adheres to the principle of risk-based pricing.
Zeman recently addressed the Griffith Foundation’s Sixth Biennial Insurance Committee Chair Seminar, comprised of chairpersons of state senate and assembly (house) insurance committees.
Zeman explained to the officials that although credit scoring has been allowed under the Fair Credit Reporting Act (FRCA) for three decades, its use has been accelerated in recent years because of the declining accuracy of motor vehicle reports, the never-ending search for better predictors of risk factors, as well as advances in technology that created the credit insurance scoring models.
“Through the development of the insurance scoring models by independent third party vendors, individual underwriters are not looking at individual credit reports or a person’s income,” Zeman said. “Instead, insurance scoring analyzes certain components of an individual’s credit history to measure the likelihood of future insurance losses. The correlation between credit and the risk of insurance losses has been confirmed in a large number of studies.”
Zeman also noted that the issue of credit scoring has been examined by state legislatures for nearly a decade. In the past few years the debate has matured and the focus in state legislatures tends to be on particular credit reporting factors including medical bills and lack of credit. Zeman said that the National Conference of insurance Legislators (NCOIL) recently produced a model bill that provides some guidance for policy makers in certain states on credit scoring proposals.
“In terms of public policy enactments, it is important to remember that if undue restrictions are placed on the use of insurance scoring, the result can only be unfair subsidies on most policyholders and that would not be a good outcome,” Zeman emphasized.
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