According to the National Association of Independent Insurers (NAII), pricing restrictions in pending legislation on insurers’ use of credit-based insurance scores would require low-risk consumers to pay “staggeringly higher” homeowners and auto insurance premiums in Washington in order to subsidize losses of higher risk policyholders.
NAII Northwest Regional Manager Michael Harrold stressed that point this week at a House Financial Institutions and Insurance Committee meeting on House Bill 2544.
“Estimates from NAII member companies vary, as would be expected in a competitive market in which insurers compete on price and for various markets,” Harrold said. “But if the 20 percent cap on rate differentials based on a credit-based insurance score factor (as provided in HB 2544) were to become law, some NAII companies have estimated that 36 to 70 percent of their current customers or prospective customers would have to pay higher prices.
“Company estimates range from 10 percent higher rates to nearly 50 percent higher, depending on a company’s current diversity of risks and pricing structure for its book of business. Just to offer one example, a married couple with two teenage drivers in Seattle or South Tacoma could experience a $1,000 increase in their yearly auto insurance premium, according to one NAII member company. And that is based on approximately a 20 percent rate increase. Imagine how much more a similarly situated family would have to pay if their insurer were even more severely impacted by this legislation and had to raise their rates by 30 or 40 percent.”
Using insurance scores for underwriting and rating has helped to make insurance coverage more available for millions of drivers and homeowners, according to Harrold. “Credit data helps insurers determine a fairer pricing structure by better matching rates with the risk of loss. Any restrictions on the use of credit or attempts to impose uniformity on how insurers use credit-based insurance scores would hamper insurers’ ability to enter new markets and take on more customers.
“Some NAII companies estimated that the percentages of their policyholders paying lower premiums as a result of their good credit histories range from 50 to 98 percent of total auto or homeowners policies,” Harrold said. “If credit information could no longer be used, then the majority of policyholders-in some cases, an overwhelming majority-would have to pay higher premiums.”
Credit information provides an objective and unbiased tool for underwriting and rating insurance risks, Harrold pointed out. Insurance scores do not consider income, address, race, ethnicity, religion, gender, marital status, disability, nationality or age. Rather, the scores are based on objective analysis of how a person manages his or her credit.
“Insurance scores measure the likelihood of future insurance losses based on an analysis of the person’s past financial behavior, not by a high-paying job, residential location or other demographic information,” he said. “If consumers pay bills on time, keep balances low and apply for credit only as needed, they can improve their credit-based insurance scores.”
Insurance scores supplement other underwriting and rating information to give a more complete picture of a risk of loss, Harrold pointed out. Insurance applications, motor vehicle records and Comprehensive Loss Underwriting Exchange (CLUE) reports are critical elements of underwriting, but have shortcomings as they are often riddled with misrepresentations, incomplete or incorrect information or do not completely capture a motorist’s accident experience.
When rates do not reflect insured losses, some consumers must pay higher premiums to subsidize higher risk individuals, according to Harrold. However, by using credit scores, insurers can charge lower premiums to customers who are better risks.
“Scholars in such fields as psychology, safety engineering, occupational medicine, consumer research and risk perception have been studying the link between insurance scores and insured losses. Financial responsibility and irresponsibility is an accepted common-sense theory about how credit history relates to loss potential,” he said.
“A person who is financially irresponsible may indicate a risk-taking personality. Insurer loss/claim statistics show that a person who is willing to take on significant financial risks is also likely to engage in riskier behavior in other aspects of their lives.”
According to a recent survey of NAII personal lines carriers, insurers are more likely to write more policies, including those in urban areas, because of credit-based insurance scoring. Motorists with less than perfect driving records and homeowners whose houses may fall short of traditional underwriting factors are being accepted and renewed by insurance companies because they have good credit scores, according to Harrold.
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