Wash. Committees Approve Bill Restricting Use of Credit-Based Scores

February 11, 2002

Washington State Senate and House committees have approved bills restricting insurers’ use of credit-based insurance scores. If enacted, the law would result in increases in auto and homeowners premiums for many Washington consumers who are less likely to file claims or experience large losses according to the National Association of Independent Insurers.

“I struggle to understand how Senate Bill 6524 and House Bill 2544 can be portrayed as consumer friendly legislation,” declared NAII Northwest Regional Manager Michael Harrold.

“By restricting insurers’ use of insurance scores, the vast majority of consumers – who have favorable scores – will pay higher premiums to subsidize the much smaller number of individuals who represent higher insurance risks.

“Numerous studies and experience have demonstrated an amazingly high correlation between insurance scores and the likelihood that a person will file an insurance claim in the future. Use of this valuable tool helps insurers to be sure that their customers pay premiums that accurately reflect their risk. That means lower rates for most consumers and is fairer to everyone.”

The House Financial Institutions and Insurance Committee approved HB 2544 Feb. 8, the deadline for bills to be reported out of committee in their chamber of origin in order to remain alive during the current legislative session. The Senate Labor, Commerce and Financial Institutions Committee reported out the companion bill SB 6524, Feb. 7.

Neither bill contained a 20 percent cap on rate differentials based on insurance scores, as the original versions did, but Harrold said other provisions in the bills would have the same effect of resulting in higher premiums for many consumers. Insurance Commissioner Mike Kreidler, whose office had drafted the original bills, proposed the current changes.

According to Harrold, one of the harmful provisions in both bills will require insurers to charge better rates to individuals who have little or no credit history, even though some companies’ actuarial data show that losses from people in that category are around 1.5 times higher than those that do have a credit history.

“That turns the principles of risk classification and fair pricing on their heads,” said Harrold.

“A number of the prohibitions contained in SB 6524 and HB 2544 are vaguely worded and subject to further interpretation, Harrold said, and a ‘wild card’ provision would allow the insurance commissioner to bar “any factor that he determines would result in unfair discrimination. There’s no telling where Commissioner Kreidler could go with that.”

In addition to barring insurers from using the absence of a credit history in calculating an insurance score, the bills would prohibit insurers from considering a consumer’s purchase or financing of a specific item, such as a vehicle or house, the consumer’s total available line of credit, or disputed credit information that is under review. Also included in the prohibitions are credit difficulties caused by health problems, the consumer’s use of a particular type of credit card, charge card or debit card, or the number of inquiries about a consumer that are made to a credit-reporting agency.

The chairpersons of both the Senate and House committees indicated the bills may be changed further in the legislative process but had to move now to meet today’s deadline for being reported out of committee.

“Both of these bills are harmful to consumers,” Harrold asserted.

“Some NAII companies estimate that 50 percent – or a much higher percentage – of their auto and homeowners policyholders pay lower premiums as a result of their good credit histories. If insurers’ use of credit-based insurance scores is severely restricted, then the majority of their policyholders – in some cases an overwhelming majority – would have to pay higher premiums. SB 6524 and HB 2544 should be rejected in their current form.”

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