AAI Calls Further NAIC Study of Credit Scoring Impractical

March 12, 2003

Conducting a study of the disparate impact of insurer use of credit scoring would be expensive and generate no corresponding benefit to consumers, according to the Alliance of American Insurers (AAI).

A disparate impact study is extremely complicated and would require extensive data to be conclusive,” Larry Kibbee, vice president of the Alliance’s Northwest Region, remarked. His comments came at a meeting of the Credit Scoring Working Group at the National Association of Insurance Commissioners’ Spring Meeting. The working group was considering authorizing the Academy of Actuaries to conduct a study to see if insurer use of credit scoring unfairly discriminates against protected classes and low-income people.

“To act responsibly, the NAIC must weigh the effort and cost against the practicality of doing such a study,” he added. “Is it worth the effort when many statutes are being enacted to control the use of credit, the federal Fair Credit Reporting Act already addresses unfair discrimination and few if any complaints are being made to insurance departments based on unfair discrimination?”

Kibbee went on to reiterate the Alliance’s strong belief that insurers should be allowed to consider credit scores in underwriting and rating decisions.

“Credit-based insurance scores are an effective risk determinant for insurers, and their use provides key benefits for consumers, such as availability and consumer choice,” he told the meeting. “In fact, the use of credit reports and scores provides insurers with a greater opportunity to write business in all markets. Their use increases risk predictability and can improve the chance an insurer will accept a risk. By adding another level of sophistication to the process, the scores allow insurers to underwrite and price business with a greater degree of certainty. This enables consumers to obtain coverage at more accurate rates.”

Kibbee noted that, industry-wide, at least two-thirds of policyholders subject to credit scoring considerations receive lower, or discounted, rates due to their favorable credit.

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