Colorado Senators KO Credit Ban

January 28, 2005

By a 5-2 bipartisan vote members of the Colorado Senate Business, Labor and Technology Committee rejected a measure that would have banned insurers from using credit history to underwrite and rate automobile and homeowners insurance policies. The action by state lawmakers will set the tone for a renewed debate on the issue in many state legislatures in 2005 according to the president of the Property Casualty Insurers Association of America (PCI).

“The most compelling factor in the senators’ decision was the overwhelming belief by their constituents that individuals with a track record of financial responsibility should pay less for their insurance,” said Ernie Csiszar, PCI’s president and CEO.

PCI has spearheaded efforts in Colorado and across the nation to enact laws that allow insurers to use credit histories and that establish important consumer safeguards on the application of this underwriting factor. Colorado lawmakers passed such a law in 2004. The law authorizes the use of credit histories but requires companies to notify applicants for insurance that credit information will be used for underwriting or rating, and prohibits insurers from denying, canceling or nonrenewing policies solely on the basis of credit information. In addition, the law mandates that insurers must provide consumers with reasons for any “adverse action” taken as a result of their credit history. Finally, the law protects consumers from adverse actions based on medical collections, identity theft or the negative credit information of a former spouse.

The Colorado House Business Affairs and Labor Committee is scheduled to consider a bill that would ban insurance scoring on Jan. 31.

“In the latest debate state legislators heard from their constituents that not only did they think the use of credit histories is fair, but that they are paying less for their insurance coverage as a result,” said Csiszar. “Without constituents standing up and telling legislators that they oppose a ban on credit – and would pay higher prices because of such a ban – it would be much easier for lawmakers to vote to prohibit its use despite the irrefutable evidence that credit history and risk of loss are directly correlated.”

Insurers have been using credit histories to underwrite automobile and homeowners insurance policies for over a decade. There have been numerous studies done by state regulators, universities, and independent researchers that demonstrate the connection between credit information and risk of loss. By considering credit information along with other familiar factors such as years of driving experience, previous claims, and age of vehicle, insurers are able to develop a more complete picture of a consumer’s risk characteristics. This enables each consumer to pay a premium that more closely matches his or her individual risk factors.

Over the past four years, approximately 20 states have enacted laws similar to Colorado’s that allow insurers to use credit histories within well-defined parameters. However, bills to ban the use of credit histories are likely to arise in other states in 2005.

To date, legislative hearings on bills to severely restrict or prohibit the use of credit history have been held or scheduled in Montana, North Dakota, and Washington. Other states that may consider proposals to prohibit or severely restrict the use of credit include Massachusetts, Maine, New Mexico, South Carolina, Delaware, West Virginia, Alaska and Michigan.

“Critics of credit histories often contend that their use results in unfair discrimination against minorities and low income consumers,” said Csiszar. “They are playing politics with allegations of racial discrimination to achieve their ultimate goal of rate subsidization. Colorado senators understood that banning the use of credit would force lower risk consumers in all economic and ethnic categories to subsidize the costs of higher risk consumers. This amounts to a hidden tax on financially responsible, lower risk consumers. These lawmakers were right to listen to their constituents and reject such a proposal and we will urge legislators in other states to follow their example.”

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