Credit scoring laws gain ground.

Credit-based insurance scoring--insurers' use of credit information to help set premiums and select risks--has been a hotly contested issue on the personal lines front for several years. In 2002 alone, some 30 bills were up for consideration in statehouses nationwide.

Insurers have long maintained that these scores serve as a valuable tool in their underwriting arsenal and can translate to lower premiums for credit-worthy policyholders. Consumer advocates have attacked the practice as discriminatory, however, and agent groups have argued that insurers too often apply this tool in an inflexible manner.

But in 2003, calls for the outright banning of this practice softened as 16 states adopted credit-based insurance scoring laws that followed--either exactly or to some degree--the model of the National Conference of Insurance Legislators, an organization of state legislators whose chief public policy concern is insurance legislation and regulation.

Under the NCOIL model, insurers can use credit information for underwriting and rating, but are prohibited from using it as the sole basis for denying, canceling or non-renewing a policy or increasing rates.

"I think it's a huge step forward in the way the states are handling this," said Joseph Annotti, assistant vice president of public affairs for the National Association of Independent Insurers. "Just the mere presence of the NCOIL model--because it addressed the major issues that consumers were concerned with and that agents were concerned with--changed the tenor of the debate on this issue."

In the coming year, NCOIL expects several more states to adopt its model legislation. And some legislatures that came close to voting on it before adjourning in 2003 are likely to be considering it again, said Candace Frick, NCOIL's director of legislative affairs and education.

"There's been a unique development, as far as how some departments are interpreting the 'sole use' provision," she said. The model states that a credit score cannot be the sole factor influencing an underwriting decision. In some states, however, when two applicants for auto insurance come out equal on the basis of other underwriting criteria, but one can be rated better than the other when credit-based insurance scores are added to the mix, regulators are interpreting that as meaning that is the "sole factor" and therefore are banning credit scoring, Frick said.

"That was not the intention of the model, so we're looking to remedy those situations and update things like that," she said.

Also, some are still voicing concern that credit scoring has an unfair impact on racial or ethnic minorities. In September, the National Association of Insurance Commissioners put off a proposed study of the possible disparate impact of credit-based insurance scoring and instead suggested that states study the matter on their own. The NAIC's proposal for a study had met fierce opposition from industry groups who called it flawed, irrelevant and even racist. Insurers say that scores are gleaned from credit reports, which don't reference age, race or any information considered as inappropriate factors in an underwriting review.

These new turns in the debate over credit-based insurance scoring show the issue isn't going away. In fact, in the NAII's annual survey of its 50 local councils late last year, 24 reported that credit scoring would be one of the big insurance issues in 2004, Annotti said.

States That Enacted the NCOIL Model Act

Since the November 22, 2002, NCOIL adoption of a model Act Regarding Use of Credit Information in Personal Insurance, the following states have enacted proposals similar to the NCOIL model.

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Source: National Conference of Insurance Legislators