NAIC Public Hearing On Credit Scoring Report: April 30

On Thursday, April 30, 2009, the National Association of Insurance Commissioners (“NAIC”) Property and Casualty Insurance and Market Regulation and Consumer Affairs Committees jointly held a public hearing on the use of credit-based insurance scores.  To view the hearing agenda, click here.

The hearing, which was held in Washington, D.C., consisted of four panels.  

• Panel One: Discussion with Credit Reporting Agencies–How Credit Scores are Developed and Used
• Panel Two: Discussion with Actuarial Representatives–Data Quality in Credit Reports and Actuarial Standards
• Panel Three: Discussion with Insurer Representatives and Insurance Producers–How Insurers Develop and Use Credit-Based Insurance Scores
• Panel Four: Discussion with Consumer Representatives–Consumer Perspectives on the Use of Credit-Based Scores

A review of each panel’s testimony and discussion is below, with individual panelists’ testimonies accessible via hyperlink by clicking on his or her name.

The findings from the hearing will be used to augment the NAIC draft white paper entitled “Review of the Use of Credit-Based Insurance Scoring by Insurers.”  To view the draft, click here.

 

Panel One:   Discussion with Credit Reporting Agencies–How Credit Scores are Developed and Used

The following credit reporting agency representatives offered testimony on methods used to develop and apply credit scores:

• Chet Wiermanski, Group Vice President of Analytical Services, TransUnion
• Eric J. Ellman, Vice President of Public Policy and Legal Affairs, Consumer Data Industry Association
• Jon Burton, Senior Director of Government Relations, LexisNexis
• Lamont Boyd, Director of Product Management for Insurance Scoring Solutions, Fair Isaac Corporation
• Birny Birnbaum, Executive Director, Center for Economic Justice

Mr. Wiermanski provided testimony on the method by which TransUnion determines its credit-based “TransUnion Insurance Risk Scores” (“TUIRS”), which are used by insurers nationwide.  TUIRS were developed to be completely transparent at all levels of the policy cycle and are based on quantifiable credit report information culled from consumer credit cards, retail store cards, mortgages and auto loans.  Public records information such as that which can be found in documents involving bankruptcies, liens and judgments, and collection accounts are used as well.  Multiple consumer-initiated inquires associated with mortgage or auto loan shopping are consolidated to minimize the negative impact to a consumer’s credit score. 

Mr. Ellman’s testimony underscored that the use of credit report information for insurance purposes is lawful, heavily regulated, commercially accepted by businesses and consumers, and statistically proven.  To view supporting materials provided by Mr. Ellman, click here.

Mr. Burton testified that credit-based insurance scores have remained stable over time, despite the weak economy.  He stated that insurance carriers do not use credit as their sole method in determining rates, and that the current credit crisis has had both positive and negative effects on credit scores.

Mr. Boyd provided testimony about Fair Isaac Corporation (“FICO®”) credit-based insurance score (“CBIS”) models.  To develop its CBIS models, FICO uses a wide variety of depersonalized credit data on millions of consumers and multi-millions of dollars in insurance premiums and losses.  Proprietary technology is used to determine the correlation between hundreds of credit variables and insurance claim performance.  Credit variables that are determined to be the most predictive of future losses are used to build the models.  Despite the current economic climate, recent analysis of FICO CBIS scoring models shows that average CBIS scores have remained stable for the general population.  To view supporting materials provided by Mr. Boyd, click here.

Mr. Birnbaum testified on the components of a credit report, non-traditional credit information, errors in credit reports, problems with fixing credit report errors, and historical inequities perpetuated by credit reports.  To view supporting materials provided by Mr. Birnbaum, click here.

 

Panel Two:  Discussion with Actuarial Representatives–Data Quality in Credit Reports and Actuarial Standards

The following actuarial representatives offered testimony on the data quality in credit reports and actuarial standards:

• Jeff Kucera, Senior Consultant with EMB America, LLC, American Academy of Actuaries
• Robert P. Hartwig, President and Economist, Insurance Information Institute
• Mike Miller, Actuarial Consultant, EPIC Consulting, LLC
• Birny Birnbaum, Executive Director, Center for Economic Justice
• J. Robert Hunter, Director of Insurance, Consumer Federation of America

Mr. Kucera provided testimony that the use of credit-based insurance scores allows insurers to better segment insurance risks in order to charge appropriate rates.  He stated that if the use of credit-based insurance scores were banned, insurance premium charges would be redistributed so that risks with lower expected costs would pay more than is actuarially fair, while risks with greater expected costs would pay less than is actuarially fair.

Mr. Hartwig’s testimony focused on the ways in which current economic conditions have affected policyholder premiums related to credit-based insurance scores.  According to Mr. Hartwig, average American consumers have reduced their amount of spending, which also has reduced their use of credit financing purchases.  This reduction in financing has contributed to an increase in many consumers’ credit scores.  Mr. Hartwig stated that, despite this change, credit-based insurance scoring remains predictive of future loss. 

Mr. Miller testified that using credit-based insurance scores leads to actuarially-sound rates and provides an accurate method of risk assessment for insurers.  He stated that credit-based scores fairly discriminate between risks, and work to the advantage of a majority of insureds.

Mr. Birnbaum provided testimony that the use of credit-based insurance scores is unfairly discriminatory within traditional actuarial standards and should be prohibited by regulators using their existing regulatory authorities.  Mr. Birnbaum stated that insurance scoring is not necessary to create a fair insurance system, and that banning the use of credit-based scoring would not prohibit insurers from using loss mitigation factors generally understood by consumers, such as driving records, anti-theft devices, type of vehicle, and catastrophe-resistant construction. 

Mr. Hunter provided testimony on why the use of credit scoring is actuarially unsound.  Reasons provided by Mr. Hunter include:  credit scores are subject to manipulation by services promising vast improvements in consumers’ scores; credit scores are not based on a logical relationship to risk; credit scores are not objective because they vary widely between credit bureaus; and credit scores are not supportive of the hazard reduction incentives employed by a sound class system.

 

Panel Three:  Discussion with Insurer Representatives and Insurance Producers–How Insurers Develop and Use Credit-Based Insurance Scores

The following insurer representatives offered testimony on how insurance companies develop and use credit-based insurance scores:

• Dave Snyder, Vice President and Associate General Counsel of Public Policy, American Insurance Association
• Alex Hageli, Manager of Personal Lines, Property Casualty Insurers Association of America
• Neil Alldredge, Vice President of State and Policy Affairs, National Association of Mutual Insurance Companies(“NAMIC”)
• Charles Neeson, Senior Executive, Westfield Insurance
• Wesley Bissett, Senior Counsel of Government Affairs, Independent Insurance Agents and Brokers of America

Mr. Snyder testified that there is no evidence to support the claim that consumers are being harmed as a result of credit-based insurance scoring, even in today’s poor economy.  Mr. Snyder asserted that there are very few complaints from consumers on the use of credit scoring, even though regulatory systems encourage it in order to promote responsible business practices and enhance existing regulation.

Mr. Hageli provided testimony in support of insurers’ rights to use actuarially-justified rating factors, including credit-based insurance scores.  He stated that credit-based insurance scoring benefits consumers by providing an accurate and objective method for assessing the likelihood of insurance losses.  This allows insurers to rate and price insurance policies with a greater degree of accuracy and at a lower rate.

Mr. Alldredge testified about studies conducted by the insurance industry, state insurance departments, and federal agencies during the past 10 years showing that credit-based insurance scores are predictive of loss, and that the vast majority of consumers benefit from the use of those scores.  To view the NAMIC policy briefing on credit-based insurance scoring provided in support of Mr. Alldredge’s testimony, click here.

Mr. Neeson’s testimony centered on the ways in which Westfield Insurance uses credit-based insurance scores.  Westfield Insurance has been using credit-based insurance scores in conjunction with more traditional methods to determine its rates since 2000, and the company has found that the use of these scores improves the accuracy of its premium pricing relative to future loss.  This allows the company to charge lower rates and offer more insurance policy choices to consumers.  Mr. Neeson stated that today, approximately 90 percent of Westfield auto-home customers have either benefitted from, or have seen no impact, as a result of the use of credit-based insurance scoring.  Approximately 75 percent of those policyholders’ premiums have been reduced.  To view supporting data provided by Mr. Neeson, click here.

Mr. Bissett provided testimony that the increased use of credit-based insurance scores has enhanced competition as companies have become more confident with the accuracy of their underwriting and rating tools, and, as a result, many agents are now able to find coverage and better prices for their clients.  He further asserted that the use of such scores is effectively regulated, and consumer protections have been implemented at the state level.

 

Panel Four:  Discussion with Consumer Representatives–Consumer Perspectives on the Use of Credit-Based Scores

The following consumer representatives offered testimony on consumer perspectives on the use of credit-based insurance scores:

• J. Robert Hunter, Director of Insurance, Consumer Federation of America
• Birny Birnbaum, Executive Director, Center for Economic Justice
• Pat Butler, Insurance Project Director, National Organization for Women
• Gregory Squires, Professor of Sociology and Public Policy and Public Administration, George Washington University

Mr. Hunter testified in support of banning the use of credit-based scoring, stating that credit-based scoring undermines core functions of the insurance system by decreasing insurance availability and affordability, and undermines the role of insurance in encouraging loss prevention.  He stated that credit-based scoring has an adverse, disparate impact on low income and minority consumers and is discriminatory; based on credit reports that often have erroneous or incomplete information; inherently unfair and penalizes consumers who are the victims of economic, medical or natural catastrophes; and penalizes consumers because of the business decisions of lenders.

Mr. Birnbaum testified in support of banning the use of credit-based scoring as well, stating that all of the consumer groups  to which he has spoken, as well as agent groups representing State Farm, Allstate and Farmers Insurance, are opposed to using credit-based scoring.  He stated that credit-based scoring does nothing to reduce an insurer’s risk; it merely skews the risk distribution towards those with lower incomes.

Mr. Butler provided testimony on the ways in which current economic conditions have affected policyholder premiums related to credit-based insurance scores.  Mr. Butler asserted that automobile liability claims vary inversely with driver credit scores and proposes two theories for this correlation:

• Theory one attributes the correlation to a direct connection between financial negligence and driving negligence;
• Theory two proposes that since people at all income levels with low credit scores must economize, many do this by reducing car ownership without proportionally reducing the amount in driving.

To view supporting information provided by Mr. Butler on the ways in which affordable automobile insurance is being negatively affected by the use of credit-based insurance scoring, click here.

As testimony, Mr. Squires provided an article he authored in the April 13, 2009 edition of National Underwriter Magazine.  In the article, Mr. Squires asserted that using factors such as education and employment status in setting property-casualty insurance rates undermines a key function of insurance – to discourage irresponsible behavior and offer incentives for responsible loss prevention.  He stated that credit-based insurance scoring also exercises an adverse disparate impact on racial minorities. 

During discussion, NAIC Committee Members asked consumer group representatives what measures– other than an outright ban–may be taken to address consumer group concerns regarding the use of credit-based insurance scoring.   Consumer group suggestions included:

• Setting a clear definition of what constitutes “adverse actions” taken by an insurer related to credit-scoring information;
• Placing a limitation on the impact of credit scores on insurance rates;
• Increasing the exceptions made for one-time life events such as a major illness or divorce;
• Increasing guidelines on the handling of “thin files” and “no hits”;
• Requiring insurers to use non-traditional credit information in formulating credit-based insurance scores;
• Requiring insurers to use an average of three different credit bureau scores in determining a consumers’ credit-based insurance score; and
• Including race for use as a variable in credit-scoring models in order to take race out of the equation when calculating insurance rates.

Following NAIC Committee Member questions, the hearing was adjourned.

 

Additional Written Testimony

Written testimony about a 2007 law that makes Delaware one of the five strictest states in the country was provided by Delaware Insurance Commissioner Karen Stewart with regard to how credit information may be used in setting insurance rates.  As of January 1, 2008, Delaware automobile and homeowners’ insurance companies have been prohibited from adjusting their current rates based on changes in the policyholders’ credit ratings.  To view Commissioner Stewart’s written testimony, click here.

U.S. Senator James Seward of New York submitted written testimony on behalf of the National Conference of Insurance Legislators (“NCOIL”), of which he serves as President.  Mr. Seward’s testimony focused on NCOIL’s 2002 credit-scoring model act entitled “Model Act Regarding Use of Credit Information in Personal Insurance.”  Provisions in the NCOIL model act include:

• Promoting credit “passes” for persons impacted by extraordinary life events;
• Prohibiting insurers from calculating an insurance score based on income, gender, address, zip code, ethnic group, religion, marital status, or nationality;
• Discouraging insurers from taking an adverse action based on “thin” or non-existent credit;
• Prohibiting insurers from treating non consumer-initiated credit inquires negatively;
• Prohibiting insurers from looking negatively upon collection accounts related to a sickness or other medical event;
• Providing that insurers may only consider multiple inquiries from the mortgage or auto lending industry in any 30-day period as one credit “hit”;
• Directing insurers to re-underwrite or re-rate if a consumer or his/her agent requests it at annual renewal;
• Requiring insurers to re-underwrite or re-rate based on credit report changes due to consumer challenges and return any amount of overpayment;
• Mandating that insurers provide key consumer notifications regarding adverse actions due to credit scoring;
• Directing insurers to file their insurance scoring models with state insurance departments; and
• Prohibiting credit reporting agencies from selling insurance-related data to third parties.

To view Senator Seward’s written testimony, click here.

 

Hearing Audio Files

Complete audio playback of the May 30 NAIC Public Hearing On Credit Scoring is available through the hyperlinks below:

• Panel One and the beginning of Panel Two discussions may be accessed here.
• The majority of Panel Two discussions may be accessed clicking here.
• The end of Panel Two and Panel Three discussions may be accessed here.
• Panel Four discussions may be accessed here.

 

Should you have any questions or comments, please contact Colodny Fass.

 

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