Legislation that would reportedly prohibit homeowners’ insurers from using credit history for underwriting, rating or payment plans in California will be considered Wednesday by the Senate Insurance Committee.
“Senate Bill 691 ignores compelling evidence of the relationship between credit history and risk of insured loss,” Sam Sorich, president of the Association of California Insurance Companies (ACIC), commented. “The bill would further damage California’s homeowners insurance market by forcing many California policyholders to pay more for homeowners insurance coverage and making that coverage less available. SB 691 is too extreme. More reasonable, balanced responses to the concerns that have been raised about insurers’ use of credit information exist.”
The concept that credit history relates to the likelihood of future loss is not a new idea, according to the ACIC.
In 1970, the federal Fair Credit Reporting Act was enacted to regulate the use of credit information about consumers. Since then, the correlation between credit-based insurance scores and the likelihood of future loss continues to be established and confirmed by
numerous studies undertaken by academics, actuaries and state agencies independent from the insurance industry. Such research and the practical experience of insurance companies confirm the correlation between credit information and likelihood of loss, Sorich said.
“A person’s credit history is a valid predictor of whether the person will have a homeowners’ insurance claim,” Sorich added. “SB 691 would force insurance companies to ignore this reality. Pricing inequity would be the result. Many consumers will have to pay more than they should be paying because insurers are prevented from considering each policyholder’s true risk of loss.”
Insurers have a responsibility to continually refine their risk classifications and their rating procedures so that premiums reflect loss potential. When rates do not reflect loss costs, some consumers must pay higher premiums to subsidize higher risk individuals, Sorich noted.
“SB 691 is not the right answer to the homeowners insurance availability crisis; it is the wrong response to hard market conditions,” Sorich said. “By prohibiting insurers from considering credit information, SB 691 would deprive insurers of a source of information that can convince an insurer to write coverage on a home that the insurer would otherwise not write. Credit information gives insurers a tool to underwrite and fairly price homeowners’ coverage. Most people have good credit histories. The use of insurance scores by homeowners’ insurers gives people with favorable insurance scores a better chance to find insurance, and often find it at prices that save them money.”
The National Conference of Insurance Legislators (NCOIL) has developed a model act on insurers’ use of credit information. Legislation based on the NCOIL model has been passed in Georgia, Indiana, Kansas, Nebraska, North Dakota and Oklahoma, and several other legislatures are considering the model.
Among other things, the NCOIL model imposes notice requirements on
insurers; prohibits insurers from using credit information as the sole reason for underwriting and rating decisions; prevents insurance scores from considering gender, address, zip code, ethnic group, religion, marital status or nationality; prohibits a credit-based insurance score from considering certain factors including credit inquiries not initiated by the consumer, multiple lender inquiries, and collection accounts with a medical industry code; requires an
insurer to periodically update a consumer’s insurance score; and requires insurance scoring models to be filed with the department of insurance.
“The NCOIL model addresses concerns that have been raised about insurers’ use of credit information,” Sorich added. “Unlike SB 691, the NCOIL model preserves the fundamental benefits that insurance scores deliver to consumers. ACIC urges the Senate Insurance Committee to reject SB 691’s absolute prohibition and, instead, follow the lead of NCOIL in crafting legislation on insurers’ use of credit information.”
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