Oregon Cracks Down on Credit Scoring Abuses by Insurers

January 31, 2003

Insurance companies will be prohibited from using credit records to cancel or not renew current policyholders under rules adopted by the Oregon Insurance Division. The division developed the rules in response to consumer complaints about the growing use of credit-based “insurance scores” to determine eligibility and premiums for auto and homeowner policies.

“We adopted these rules to crack down on a variety of insurer abuses with respect to the use of consumers’ credit history,” Oregon Insurance Administrator Joel Ario said. “Oregonians have a right to know if their credit record is being used for insurance purposes, how it’s being used, and how they can correct any errors in their credit report.”

The Insurance Division developed the rules with input from an advisory committee representing consumer groups, insurance agents, and insurers.

A recent survey of the 100 largest personal auto insurance writers by Conning & Company found that 92 percent used insurance scoring, and the practice also is commonly used for homeowner policies. Insurers say credit data, along with traditional underwriting factors such as driving record or type of home, helps them more accurately predict future claim costs and price their products accordingly.

“Our new rules address a wide range of abuses,” Ario said, “starting with the ban on using credit history to cancel or not renew current policyholders. Current policyholders should be judged on their records as policyholders and should not be canceled or non-renewed because of credit problems.”

The rules allow insurers to continue using credit for assessing new applicants and for setting appropriate premium levels, but companies must develop written policies that ensure consumers are treated consistently and fairly, and must provide actuarial documentation for any use of credit in setting premium levels.

Ario said many consumers don’t know their credit records are being reviewed, so the rules require insurers to tell new applicants if they will be subject to a credit check and to provide a written explanation of their credit scoring policy upon request.

The Insurance Division also heard from consumers who had errors in their credit reports. Under the new rules, when an insurer denies coverage or charges a higher premium because of a consumer’s credit record, the insurer must provide specific reasons for the action and give notice of how the consumer can correct any errors. The insurer also must give retroactive relief when premiums are based on erroneous credit information.

Some critics of credit scoring have called for banning the practice, but Ario said such a move would require legislative action. He also noted that while legislatures in some other states have addressed the issue, for the most part they have adopted measures similar to Oregon’s new rules.

The rules were adopted in December and go into effect in June. More information is available on the division’s Web site: www.oregoninsurance.org.

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