Trade Groups Voice Outrage To NAIC Over McCarty Remarks

National Underwriter--June 2, 2008

BY DANIEL HAYS
NU Online News Service

SAN FRANCISCO —Trade group representatives appearing before a National Association of Insurance Commissioners panel yesterday leveled heavy criticism at the group for allowing one of its members to appear before Congress and make negative remarks about the insurance industry’s use of credit scoring.

The groups expressed anger over the May 21 remarks of Florida Insurance Commissioner Kevin McCarty, who appeared on the NAIC’s behalf at a hearing on Capitol Hill on two bills that propose to ban credit scoring. Industry representatives said Mr. McCarty expressed a minority viewpoint not reflective of the majority of the commissioners’ home states.

Neil Alldredge, representing the National Association of Mutual Insurance Companies, told the NAIC Industry Liaison Meeting in San Francisco that Mr. McCarty could have portrayed the NAIC and the states as acting with uniformity by informing Congress that 48 states have laws dealing with credit scoring and there was no need for federal legislation on the issue.

“It was an opportunity lost” to portray the state regulatory system for insurance as able to handle tough issues, and Mr. McCarty’s testimony “almost created an inflammatory issue.”

Two bills were the subject of the hearing on Capitol Hill. A measure introduced by Rep. Luis Gutierrez, D-Ill., would ban the use of credit scores for underwriting in any line where the Federal Trade Commission (FTC) found use of customer credit history served as a proxy for race-based underwriting. A bill from Rep. Maxine Waters, D-Calif., would ban the use of credit-based insurance scores altogether.

Mr. McCarty said the NAIC supports the limited ban on the use of scores under the Gutierrez bill, and he drew a rebuke from Rep. Miller for offering his personal support for the Waters legislation.

The Florida commissioner told Congress he did not doubt that when initially adopted by the industry there was no intent to use credit scores to impact minorities in a disparate manner or to discriminate. “Yet, empirical studies indicate a negative impact on these groups, and the industry’s attempt to ignore this issue shows a failure to treat its consumers fairly and equitably,” he said.

“Clearly, legislators and regulators must weigh the benefits of simplistic claims prediction with sound public policy. We must remain vigilant of the use of any factors that appear to be highly correlated to race and income level,” he said and noted that a Consumer Reports magazine study showed that 50 percent of credit reports contained errors.

“The clear problem with the use of credit scoring is the relationship of credit scores to race, ethnicity and income status. The 2007 FTC Report asked and answered its own innocuous question: Is credit scoring solely a proxy for race? This ‘straw man’ question was not deserving of this report,” said Mr. McCarty.

However, he noted that if “the phrase ‘solely a proxy’ is intended to mean ‘direct substitute,’ then clearly credit scoring is not a proxy for race.”

Deidre Manna, representing the Property Casualty Insurers Association of America (PCI), said the trade groups had earlier raised concerns about how the NAIC established testimony it gave to Congress.

David Snyder, speaking for the American Insurance Association, said Commissioner McCarty offered a minority position to Congress and trade organizations saw “a danger” that the NAIC could offer such a viewpoint again. He noted that Mr. McCarty also offered testimony “attacking” use of education and occupation to rate insureds.

He added that the number of consumer complaints concerning credit scoring in two states ranged from 12-to-50, indicating the credit scoring process has worked but “that message got lost.”

Acting Pennsylvania Insurance Commissioner Joel Ario, defending Mr. McCarty, said that if commissioners were asked if they supported credit scoring if it served as a proxy for race, the regulators would say they opposed it.

The commissioners at the session, chaired by Illinois Insurance Director Mike McRaith, also heard criticism of their handling of plans to collect market conduct data.

Michael Lovendusky, associate general counsel for the American Council of Life Insurers, characterized the NAIC as split between its 130-year-old persona that worked well with industry and a newer side that has “undermined and destroyed” cooperative efforts. “A lot of trust has been lost,” he said, because the organization has been doing work behind closed doors, sending the industry on ‘a scavenger hunt for information.’”

Mr. McRaith, at the close of the session, told industry representatives that rather than voicing criticisms, they would do better to bring forward specific proposals for handling issues of concern to them.

Yesterday’s session was limited to less than one hour and Mr. McRaith said the industry liaison committee would schedule a conference call with industry representatives for every quarter.

NAMIC’s Mr. Alldredge said the various trade groups could do better in discussion if they were not limited to three minutes apiece on a conference call.