NAII Stresses Legal, Competitive Reasons for Use of Credit Information

February 4, 2002

Insurance scores provide companies an objective and unbiased underwriting tool, Sam Sorich, vice president and western regional manager of the National Association of Independent Insurers (NAII) explained last week during a Nevada symposium on credit-based insurance scores.

“Studies and statistics conclusively show that a strong correlation exists between a person’s likelihood of experiencing a loss, such as a car accident or property damage, and how an individual manages his or her finances,” Sorich said.

Insurance scores determine a fairer pricing structure by better matching rates with the risk of loss, Sorich said.

“Using insurance scores for underwriting and rating actually helps make insurance coverage more available for millions of drivers and homeowners,” he added.

During the informational hearing, Sorich touched on the legal authority for the use of credit reports and why insurance companies place value on insurance scores:

Federal and Nevada credit laws – Insurers have been authorized to use credit information about consumers since 1970, when the federal Fair Credit Reporting Act was enacted. The Act permits insurers to use credit to determine whether or not to issue, renew or cancel a policy, rates to charge and terms of coverage. However, personal lines insurers began to widely use credit scores only during the past few years as Fair, Isaac and Company, Inc. and some insurance companies developed systems to analyze how certain credit characteristics relate to loss ratios for auto and homeowners insurance. Credit-based insurance scores are products of these systems, Sorich said.

Nevada law recognizes insurers’ authority to use credit information for underwriting and its statutes on credit reports mirror some provisions in the federal act, such as the requirement that insurers must advise consumers when they deny insurance, non-renew their policy or charge a higher rate because of credit history. Both Nevada and the federal act also mandate that insurers provide consumers with credit reporting agency information if such action is taken.

Why insurers use credit – Credit-based insurance scores are used by a majority of private passenger auto and homeowner insurers in underwriting, pricing or in reviewing applications and renewals.

“Insurance scores achieve long-standing underwriting goals by being objective, complete, efficient, equitable and increasing the availability of insurance,” Sorich said.

Insurance scores meet these goals by:

Not considering 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.

Supplement other underwriting and rating information-such as insurance applications and motor vehicle records- to give a more complete picture of a risk of loss.

Streamline the underwriting process and reduce costs. Ready access to credit-based insurance scores allow companies to decide whether it will order motor vehicle records or claim reports on new business applications who obtain a certain insurance score.

“When rates do not reflect loss costs, some consumers must pay higher premiums to subsidize higher-risk individuals,” Sorich said. “However, by using insurance scores, insurers can charge lower premiums to financially responsible consumers and, in some cases, make insurance more available to drivers who have less-than-perfect driving records and homeowners whose residences may not qualify under so-called traditional underwriting factors.

“Consumers who pay bills on time, keep balances low and apply for credit only as needed can improve their credit-based insurance scores and benefit from this underwriting mechanism widely used by insurers,” Sorich said.

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