Doing the right thing: insurers struggle endlessly to balance their commercial interests with their role in meeting basic social needs. What needs to happen for them to succeed?

If America has a social contract, much of the fine print is in its insurance policies. When the terms of that contract come up for debate, the insurance industry often finds itself squarely in the middle, trying to balance the commercial imperatives of a for-profit business with the unique responsibility of shouldering risks that society has deemed too big for individuals to carry alone.

Those debates are loud and frequent, suggesting that the social contract is far from finished. But instead of lofty principles, the arguments often come down to the minutiae of credit-based insurance scoring, mandated health benefits of myriad other issues that keep insurers busy in legislatures, bureaucracies and courtrooms.

Best's Review assembled a roundtable of industry, regulatory; consumer and legal representatives to explore the issues that underlie the persistent tension between insurers' business interests and society's expectations. The discussion exposed an unsettling gulf between the two--but also surprising consensus on the nature of the problem, if not the solution.

Selective Failure

America's prevailing approach to insuring major, largely personal risks is irrational, and the result has been a "market failure," said Birny Birnbaum, executive director of the Center for Economic Justice and a funded consumer representative to the National Association of Insurance Commissioners. The issue begins, he said, with the crucial place insurance has assumed in economic life.

"Insurance as a product is just an essential tool for individuals and communities to preserve their assets and build their economic capabilities. It's a really critical social mechanism," Birnbaum said. "When you look at the public policies regarding insurance, particularly in the property/casualty lines, there are two important public policies: universal coverage and loss prevention." But those goals run afoul of a central tenet of insurance underwriting--risk selection, which has become "ultra-refined" with the advent of tools such as credit-based insurance scoring, Birnbaum said.

"So, the primary form of competition is risk selection," he said. "Well, in a normally competitive market, what would happen is that [with] sellers pursuing their self- interest [and] buyers pursuing their self-interest, Adam Smith's invisible hand produced the great public good. But what you have in the insurance industry, particularly with the risk-selection competition, is a market failure. Because insurers pursuing their self-interest and doing what they should do, pursuant to market incentives and market imperatives, actually creates availability and affordability problems. And credit scoring, to me, represents kind of the epitome of the end of insurance and the beginning of essentially a lottery system. You're moving away from broad, risk-spreading mechanisms to almost a pay-as-you-go system."

But Birnbaum took pains to point out that insurers are behaving rationally on behalf of their stakeholders. "That's where the market failure comes from, because what we're saying is there is essentially a requirement for nonmarket outcomes, but we somehow want a market mechanism to provide for those nonmarket outcomes," he said. "It just can't happen!"

Finite Resources

George Nichols III of New York Life Insurance Co., a former Kentucky insurance commissioner, cut to the dollars-and-cents issue raised by Birnbaum's analysis.

"Bottom line: how do you finance the insurance?" Nichols asked. "Kentucky passed the Clinton health plan in 1994. All of the insurance companies in the health market except two leave the market. The fact is, we guaranteed coverage for all." The result, however, was a flood of newcomers into a system that wasn't priced for the added risk, and the surge in rates that followed eventually pushed even previously insured people out of the market, Nichols explained. Several years of tinkering eventually led to the creation of a high-risk pool, subsidized with funds from the national tobacco settlement, he said.

Who's Going to Pay?

"Now, no one in the world was going to argue that it was the right thing for us to do to try to make coverage available for every citizen in the state of Kentucky," Nichols said. "But the question was how are you going to finance that; whether it's regulation, market forces or whatever--there's only so many dollars in the system. And unless the government's going to put money in, I as a consumer am saying, are you asking me to pay $10 more for everybody to have coverage?"

The debate over risk selection reflects the hard financial reality, Nichols said. "I remember being a regulator, saying that, 'Insurance companies, you're in the business of risk, so why are you getting to where you are trying to get the best risk?' But the fact is, the reality of the system is, there are so many dollars there," he said. "So my question to you is: If someone were to accept your argument that there's a failure of the system, let's start going to reality and say, how am I to fund this system that exists on insurance--whether it's auto, home, life and health--how am I supposed to fund it?"

Catching Up With History

Those questions of how to provide and pay for insurance are proxies for deeper, unresolved questions about America's social contract, suggested Gordon Stewart, president of the Insurance Information Institute.

"In many parts of the world, particularly in Western Europe, the insurance aspect of the social contract was negotiated out, in many areas that we're fighting over now, from the late 19th century," Stewart said, citing the example of Germany's first chancellor, Otto von Bismarck. He used what were essentially insurance tools--including workers' compensation, social security and health care--to help neutralize the appeal of Marxism and secure federal powers of taxation, Stewart said.

"What's the point of this? During that period of time, the United States was settling its frontier--not working out this aspect of the social contract, which is how are the risks of old age, of health, of cars, of businesses, of automobiles going to be mandated, paid for, apportioned within the U.S. population," Stewart said. "And much of the arguing that takes place today concerns, I would submit, negotiating these unresolved terms of the American social contract that were not dealt with because we were settling a frontier and building a very diversified, by the way, property/casualty industry, because it grew up as the frontier was settled."

The unresolved questions underline many of the insurance-related battles being fought today, Stewart said. "These are of deep importance--far beyond the credit score," he said. "Huge fights over what is the relative role of private--that is, must-make-profit--companies."

Delicate Balance

Dr. Donald Young, president of the Health Insurance Association of America, painted the issue in shades of gray.

"The point Birny's raising isn't yes of no, it isn't binary; it's how much," Young said. "How much market and how much regulation? If you look at the private market, look at it from its positives. Again in health, every single innovation in the last quarter of a century in health-care financing--things like networks and credentialing and disease management--has come from the private market, and that's because of the profit motive and the desire to meet the needs of customers. So I don't think it's a yes or no in the American economy ... it's how much is reasonable and appropriate.

"And if you look at the spreading-the-risk issue, I can point to a lot of regulatory initiatives that, while well intentioned, have prevented us from spreading the risk," Young continued. "Look at the problems in the individual market, and look at the state regulations where virtually we were driven out of markets by state regulations, and people lost their insurance. And if you want to spread that risk, you need the healthy people in with the others, you need the young with the older, and when the regulations step in and begin telling you what you can do, the healthy folks aren't going to buy the insurance that spreads the risk. So that takes us back to George's question--who's going to finance and pay for it?"

A ticklish question that arises is cross-subsidization--is it fair for lower-risk groups to subsidize higher-risk groups in the name of affordability? "When we say things like, youthful drivers or people who aren't married--there's a subsidy there," Birnbaum said. "Well, what exactly does that mean? At some point in time we can identify a group of consumers who are going to have a lower claim cost than another group of consumers at some point in time. The fact of the matter is that a youthful driver is going to grow up. And over time he of she is going to pay premiums, so what is the rationale for charging a lot higher rates for a youthful driver, when what our public policy goals are is to encourage the universal coverage and to promote loss prevention?" This, Birnbaum said, is where the conflicting interests clash. "And that's where I call the market failure," he said. "It's the disconnect between the imperative for insurance companies and the public policy goals of universal coverage and loss prevention."

The expectations that have taken root among consumers add to the difficulty, for health insurers as for others, Young said. "The problem is people don't necessarily want health insurance," he said. "They want health care. And No. 2, they want healthcare that somebody else will pay for. People don't know what health care costs today. They can make suggestions on individual services. They don't know what their employers pay in the employer market for insurance. They think it's much lower."

What Do They Expect?

Ann V. Kramer, a partner with Anderson Kill & Olick, the prominent policyholder law firm, suggested that consumers' expectations are broadly out of sync with how the insurance industry actually works. "None of this is understood by any consumer," she said. "And with respect to health, I think people do want socialized risk for all health.... People think they have it. That's part of what's going on. We lost the mutual insurance company, we lost the Blues, everything has become profit-making. But the consumer expectation never caught up with that, and that's why you have movies where the most hated institution in America is the HMO. Consumers still think that they have an entitlement to health insurance--universal health insurance--and they're not getting it, and there's something wrong. I don't know that consumers actually care where it comes from. Whether it came from private institutions of government, we can debate that forever, but they think that they're entitled to universal health insurance."

What consumers do believe is that when they have a claim, the system doesn't work as they expect it should, Kramer said. "It doesn't work," she said. "You know, when you get to making a claim, you end up in this enormous bureaucracy ... and everybody who's in the regulatory market knows stories that you essentially need an advocate to go through the health insurance minefield for you, because you're sick, you're depressed, you're whatever, you can't go through that minefield by yourself. "That, in turn, encourages people to cheat, she said. "Why do people feel entitled to commit insurance fraud? Because they believe the insurance companies are defrauding them out of what they pay for," she said. "That instinct has to do with the experience of the public on trying to collect on claims."

Nichols cautioned against underestimating consumers or treating them as a group with a single, collective best interest. "I'm sorry; I refuse to accept that consumers are these dumb people out there that don't know insurance," he said. "They do." Their understanding of the fine points might be limited, Nichols said, admitting that even he found some policy language to be daunting. "But they did know that, I'm paying a dollar and if I have an accident, somebody's going to pay for that--whether I have to fight about it or not.'"

"The greatest problem I had as a regulator was when people were telling me I was supposed to think for the public and what was in their best interest," Nichols said. "Which consumer do you want me to represent? Do you want me to represent the upper class, do you want me to represent the middle class or do you want me to represent the lower class? Do you want me to represent the one who doesn't work or the one who does work? You tell me how I'm supposed to have all those multiple thought processes in my head and set regulation and policy based on where you sit on that continuum."

Because consumers understand more than regulators think they do, Nichols said, "I believe that consumers are willing to pay. They are willing to pay for the services they receive. They may not understand that the cost is greater than what they imagined, but I think there are people willing to pay their way through this system."

Young sought to dispel any notion of insurers picking up the financial slack. "Ultimately, it's the consumer who's paying for it, it's the purchaser who's paying for it," he said. "So, you have to think back to where that financing ultimately is coming from, and the more requirements you layer on that drive up the cost, the more mandates you layer on, the more people are going to look and say," That's not affordable to me anymore.'"

Young also argued for empowering consumers. "There's one mindset that says it should be done by regulators who are standing afar. There's another one that says, 'let the consumer do it.' Different people have different risk tolerance, different people have different needs," he said. "And the more you regulate and tell people what they have to have, which is what mandates [have] done, the more you take it away from the individual to choose what they want. I want a $2,000 deductible because that fits my life. I want first-dollar coverage because that fits my life. But why should a regulator come in and tell me what I have to buy?"

Young also posed more fundamental questions for health insurers to contemplate: "Do we sell health insurance in this country? Of do we sell prepaid care? Haven't health insurers lost their way?"

Beyond the Market

Part of the answer to the financing question, Birnbaum argued, lies outside of the private, insurance-based system. A combination of external financing and regulatory intervention would move the market toward the policy goal of coverage for all, he said.

"You know, companies can be socially responsible, but when push comes to shove, if you're a stockholder-owned company, you're responsible to your shareholders," Birnbaum said. "And you've got to be responsive to that. And if it means that you have to do things that may not be what regulators think is socially responsible, but it's within the scope of the law, then you do that. I think that if you're going to talk about responsibility, then there has to be a mechanism for accountability to the public." Banks are held accountable, Birnbaum said, through measures such as home mortgage disclosures and the Community Reinvestment Act.

"That mechanism is sorely missing from insurance," he said. "Insurance companies, particularly in the property/casualty line, have fought for years against any kind of disclosure about their market performance, and I think that that's a real problem. I think that that type of disclosure--for example, ZIP code data disclosure--instead of something to be feared, is something to be embraced, the notion of more of a partnership with members of the public in the same way that you see those partnerships in the lending field." Birnbaum, an economist, acknowledged the competitive pressures of the market but suggested there's a time for government intervention when the results in the marketplace are at odds with public policy.

"I think the trick is to intervene in the market where there is a demonstrable failure and to do so in a way that nudges the market in a certain thing," he said. "You don't want to have heavy-handed regulation, you don't want to be telling companies what to do, but the example that I gave earlier is, why not put limitations on risk classification? Why not develop risk classifications, particularly in the property/casualty lines, where the results are more consistent with the public policy goals, because I think what we see now with credit scoring is basically a revolution in risk classification. It's really a movement away from broad risk spreading to this ultra-refined classification and the use of any piece of information that's possibly available, whether it's related to risk or not, to segment the market for the purposes of that selection competition."

Stewart, however, disputed the notion of a "market failure."

"Whatever your issues are with credit scoring, and there are many issues that surround credit scoring, it is difficult to argue at a time in which we have record home ownership that is rising," Stewart said. "Home ownership in the inner cities is now at record levels; there's nobody we know that isn't driving a car because of credit scoring. To say that the need to intervene in the credit-scoring issue is relative to market failure--I don't see where the market's failure exists. Nor do I know of any economists, as we define the term, who do believe there's a market failure in that regard.

"As to risk selection, surely you note that it is essential to the performance of insurance by any entity, whether it's the government or not," Stewart said. "Now risk selection really means not, 'You have it or you don't,' but the pricing of that risk--how is that risk evaluated and then how is that risk to be charged? And that's where we come into the profound social questions, particularly if an insurance coverage is mandated. Then if it's made a public obligation, how is it to be paid for? Is it fair to create a public mandate and then expect everybody to be able to pay for it? Similarly, is it fair to create a public mandate and expect the private sector to pay for it? The only way the private sector will participate in something is if it can be profitable. So, can you make something profitable that is also affordable and then mandate it at the same time?"

The need for profits is there regardless of a company's ultimate mission, Nichols noted. "Even not-for-profit has to make money, because as a regulator my objective was to make sure they'd be there in the future to deliver on the promise of which they had a contract with an individual," he said. "One of the things I was concerned with was, even if you're not for profit in your rifle, you better make money, you better have the reserves to be there tomorrow. That's what regulation's about."

Nichols also suggested Kramer was premature in declaring mutuals all but extinct, citing the example of his own company. "The mutuals have not left, OK? New York Life mutual is still there, and we plan on being there for a long time," he said. "The fact is, mutuals will exist as long as they have an opportunity to make a profit and financially be viable to be there for the future."

Changing the Perspective

But there's more to regulation than checking the books, said Holly Bakke, New Jersey commissioner of banking and insurance.

"I think as a regulator, we traditionally define ourselves as those people who are responsible for making sure the insurance companies are solvent, they meet their obligations and they perform as promised," she said. "But really it's much more than that, and I think we as regulators are going to be shifting our point of view as well, and it is about balance. And the balance is an interesting one. You have to create a competitive marketplace where companies want to come to do business, because you want to provide homeowners insurance and auto insurance and medical-malpractice insurance and all of those things. And the challenge is how you create that connective marketplace while assuring that consumers are protected and served. And that's no longer just a solvency question, If I were to look at New Jersey, New Jersey's been seeing all of its capital in the auto market leave." The reason, she said, is that investors take a dim view of putting money into the historically troubled New Jersey market.

But that doesn't change the reality facing consumers and regulators, she said: "Auto is required in New Jersey. You have to have coverage.... So, when we do this balance, you do need to look at these companies and say, 'you need to be responsible.' Yes, part of insurance is underwriting, it's risk management, and you're going to go out there, and we're going to give you the tools to manage your business. But along the way, you're also going to have to be socially responsible," Bakke said. "In New Jersey we struggled to make sure there's enough coverage in urban areas, quite frankly. Are there enough agents writing, are there enough opportunities for people to purchase homeowners and auto coverage? Is there enough competition in those markets? We look at these companies now and say, 'New Jersey's a great place to come do business, but when you come, you're going to have a degree of social responsibility to help support all of the areas in the state.'"

Lost Opportunities?

As risk selection grows more sophisticated, Birnbaum suggested that it not only runs counter to the risk-spreading principle of insurance; it also undermines another social benefit. "You also are using consumer characteristics that really have nothing to do with loss prevention," he said. "No incentives for reducing your risk. No economic disincentives for engaging in less risky behavior."

"There's no question that at least in property/casualty where I do my work, there's been a lot of effort and money spent on behalf of insurance companies at loss prevention," Birnbaum said. "But there's a real disconnect between those efforts and the way that the product is priced and classified. When the most important factors are ... things like age, marital status,your credit history, as opposed to things that are within a consumer's control and that are directly related to some kind of economic incentive for less risky behavior, there's a tremendous disconnect between the money spent on loss prevention and the financial incentives--the risk classifications--that should be focused on that loss-prevention stuff." De-emphasizing factors such as credit scores and emphasizing items such as speeding tickets can help consumers understand how their actions relate to the cost of insurance, Birnbaum said.

But Stewart cautioned that backpedaling on risk selection would require other adjustments. "A property/casualty contract is not a lifetime arrangement," he said. "It is an agreement for an insurance entity to take risk from an individual or a company for a particular period of time. Now, if that period of time is the time in which that individual is a male between 18 and 19, the likelihood of a loss in that time frame is much higher than in another time frame. So, to somehow want to make all that go away and say that the insurance is the new risk bearer [and] should see this individual not as an 18 year old, but, as a lifetime human being, would require a very different contract ... if we want to rewrite the understanding of the expectation, then that will require a substantial public role."

Health insurers face their own set of issues on loss control, said Young. "If you look at loss reduction, 20% to 30% of health-care spending in this country is still for services that are of no value," he said. "Half of every antibiotic prescribed to kids does no good or harm. We paid for years for bone-marrow transplants for carcinoma, cancer of the breast. And I can go down and down that list--many things were mandated, required by law. Insurers did move to deal with that, and the public backlash against that was substantial, and I think part of that message is, 'We don't think this is an insurer's role to do this.' And yet, we have the information."

The health insurance industry has a long track record of working to keep costs in check, Young said. "If you look at insurers over the history, what one group has made more noise about trying to control the increase in healthcare costs than insurers? We're doing that for a reason," he said. "Those are our customers. And when the costs go up, we lose customers."

"It's not enough to take in premiums and pay out claims," said Bakke. "At some point you have a responsibility to help reduce that risk in ways other than risk selection. I can look at the use of technology for automobile insurance. There's tremendous technology that reduces accidents. You don't see that being used as a way of reducing risk and controlling cost."

Stewart pointed to many advances in auto safety that insurers have promoted, but he added that some factors, such as the design of traffic systems and how a state manages population density, are out of insurers' control. In other fields, insurers build in "powerful" incentives for loss control, he said. "The entire: workers' comp area is priced in a way to do that, and you will not find a major workers' comp company that does not have extensive litigation intervention," he said.

The loss-prevention issue crosses many lines of insurance. "If I look on the medical-malpractice side, there are tremendous things that can be done to reduce risk," Bakke said. "Companies are not funding those things that would reduce risk. And that's problematic to me, because that's a cost in the system that doesn't need to be there. And we talked about what fraud does in terms of cost to a system--excuse me, reducing risk and managing risk will keep cost out of the system."

Bits and Pieces

For Bakke, the medical-liability crisis is one embodiment of a fragmentary approach to an issue that is more than an insurance problem. "Do you know what it really is? It's the entire medical system," she said. "It is access to health care, because people are leaving because they can't afford premiums. It's the fact that roughly 5% of the doctors are responsible for two or more of the malpractice incidents and more than 60% of the payout. So, is that saying that doctors don't regulate themselves well enough? Maybe. How about HMOs--the fact that they limit reimbursements to doctors so that they can't pay their premium? So, it's a much larger problem--and yet, our knee-jerk reaction, because we're living on this limited playing field ... is the same old, 'OK, it's medical malpractice, it's the number of verdicts, it's verdicts going wild, or it's really the bad insurance companies, the bad "lawyers of the bad doctors. And the debate hasn't changed, and yet the problems have shifted ... closer to the social contract."

"An unintended consequence of HMOs is that doctors can't pass through the cost of being in practice," Bakke said. "No one ever thought that through. So, I'm sitting here and saying I have read every article about malpractice and it still focuses on the same cap. To cap or not to cap--that is the question. That's not really the question, to cap or not to cap, so how do we take a very dynamic marketplace and free ourselves of the conventional wisdom? How do we force ourselves to challenge what people traditionally think and begin to look at where we have moved, where the system has taken us?" she asked. "We need to poke at ourselves on a regular basis to say, 'You know what, maybe I don't understand the problem I'm trying to solve.'"

The Political Trap

Learning to see issues in a broader context has been a major step, Bakke said, but she and Nichols both noted that when the debate enters the political arena, the most thoughtful analysis can fall by the wayside.

"If I were the perfect regulator and knew exactly the perfect public policy, I could never get it through, because it all depends on who has the clout," Nichols said. "There were more times that I thought, "This was the right thing to do, this is going to avoid the outcome that I don't want four years from now,' and I'd walk into a meeting and some powerful legislator sitting there with me with their No. 1 lobbyist, and they would say to me, 'You and my friend need to work it out. You all call me when you're finished, OK? 'That's public policy."

Bakke said her knowledge becomes a key asset in the policy discussions. "What I find in the debate is always a lack of information, and I as a regulator now see my role as providing objective information, so it gets more difficult to act just in response to constituents' needs, and it'd be easier, I hope, to advocate a position that's responsible because it becomes factual information," Bakke said. "And that's why I get back to the role of the department in shifting what we do within the types of information we collect, so that we can be a person who stands up and says.. 'You need to reconcile what you're doing with these facts.'"

"I totally agree with Holly that you have very interconnected problems, but you have a political system of entrenched interest that doesn't allow you to approach problems that way," Kramer said. "And I don't see our political system and the lobbyists and an the money that goes into the system allowing for that to happen."

Searching Society's Soul

Insurance has never been far from major debates over social policy. Stewart noted that mutuals trace their origins to the idealist Protestant movements, largely socialist, that were coming to America from Europe in the early 19th century. "And so they formed, ironically enough, some of the first--and actually longest lasting--socialist entities in the world: a mutual company, which is essentially that, and they're idealistic, socialist cooperatives," Stewart said. "They have continued to be able to be successful partly because there's a leverage or all arbitrage between their profit requirements and those of the not-for-profit world. But within this there is the onward carrying seeds of the negotiation and debate over the fundamental terms of the social contract, which includes not only obligations, but expectations. And it comes to what kind of a society do we wish to be? What are the obligations within the state of America of the government, its insurance entities, the public, all of the political process, to meeting the expectations of life? And are those expectations realizable, are they realistic, can they be met, who's going to pay for them?

"Right now, there are riots in the streets of Paris," Stewart said. "Are those riots about the war in Iraq? No. Those riots were about exactly these questions. Generational transfer, where are the pensions going to be coming from, at what age can you retire, how long do you have to work, who's going to take care of your health-care issues?"

The stakes are high. "There is no insurance problem that is not a broader problem," said Stewart, "and that makes this industry deeply unique."

90 minutes in New York

Best's Review invited six distinguished insurance professionals to join a special roundtable discussion on June 21 at the New York Hilton and Towers. The session was timed to coincide with the Summer National Meeting of the National Association of Insurance Commissioners, which cooperated in scheduling the event. Responses to this one question consumed most of the 90 minutes:

"Given the importance of insurance in so many spheres of everyday life, is access to affordable insurance an entitlement, and if so, how is that reconciled with actuarial principles of measuring and pricing risk?"

The results of that discussion are presented here.

Mismanaged Expectations

"The way insurance companies become profitable, continue to create profit from the premium, is by slowing down when they pay and lowering the amount they pay. And consumers don't expect that. So you have in the marketplace a problem of expectation, a problem that consumers don't understand that this is a capitalist market, that that's what's going on with the insurance industry. So, I'm looking at a lot of different problems in the market--from a policyholder perspective--of a lack of understanding."

--Ann V. Kramer, Partner, Anderson Kill & Olick

The unfunded mandate 

"If you say you've got to have auto insurance, it's essentially an unfunded mandate on consumers. So, the notion that you're somehow going to take a system and say, you've got to structure your system so that everybody, no matter what their economic circumstances are, can afford the product--it's impossible. So, if you're going to have a public policy of universal coverage--whether it's for auto insurance or health insurance--then you have to look outside of the insurance mechanism for some assistance in financing it."

--Birny Birnbaum, Executive Director; Center for Economic Justice Funded Consumer Representative to the National Association of Insurance Commissioners

The negotiation

"[I]nsurance at the core is, I think, the most important and unique business in America today, because it is the primary arena in which these vital terms of the social contract--who will care for me in my old age, who will pay the medical bills of my child, how can I have a car, can I own a home--are going to be worked out. And I would like to approach them in the spirit of frankly trying to negotiate out the most rational terms for a liberal democracy to perform these functions, rather than to see them as forces of and evil."

--Gordon Stewart, President, Insurance Information Institute

Finding the Focus

"I personally have come to the point where I need to have a sense of what I'm working toward ... We're not going to get everything that we want. The political process with a capital P and a small P is very difficult, but it sets the tone for policyholders and consumers. There's never a time that I go out and don't talk about policyholders and consumers. And, to me, that's a real fundamental change to put the emphasis on them, so I'm not just this rate reviewer, and so I'm not just this person who pushes paper."

--Holly Bakke, New Jersey Commissioner of Banking and Insurance

The Subsidy

"Let's have a scenario that says we're going to have one large pool in my insurance company--I'm not going to do any segmentation. What that says is that the 19-year-old healthy person who just has his first job is going to subsidize the 60-year-old who is high income but been a smoker all his life and 40 pounds overweight and etcetera. Now, that may be what we want to do, but that gets back to the question of negotiating what is in this overall social interest."

--Dr Donald Young, President, Health Insurance Association of America

Tug of War 

"I remember when Birny would come to me and say, 'why can't regulators do more about credit insurance?' And the industry would come and say, 'why can't you do more about rates or less regulation?' The reason we couldn't is because the other consumer advocacy group or the other insurance company always was pulling at the system. And I don't think we give enough recognition to the lobbying effort that goes into how this business is regulated."

--George Nichols III, Senior Vice President, New York Life Insurance Co. Former Kentucky Insurance Commissioner

Undue Credit?

One consumer advocate puts it in a class of underwriting tools that herald "the end of insurance." Insurers see it as part of a new era in risk selection--reliable, unbiased and usually to the consumer's advantage. Either way, credit-based insurance scoring has become another marker on the fault line between insurers' efforts to turn a profit and public expectations of available, affordable insurance.

Credit-based insurance scores, used primarily with automobile and homeowners insurance, draw on various information in consumers' credit reports, such as collections, bankruptcies, outstanding debt, length of credit history, types of credit in use and the number of new applications for credit. These factors are run through mathematical models to produce the insurance scores that insurers use to help in their underwriting decisions--whether to offer or deny coverage, and at what price. Because most consumers have good credit, insurers say, the scores help them to accept more applicants at lower prices than they would otherwise.

Insurers are adamant on the statistical correlation between an applicant's credit-based insurance score and the risk of loss. But they're in the awkward position of having no linear explanation as to why the scores work. There are theories of a link between careful financial management and more prudent, less risky overall behavior--but they're just theories. Insurers note, however, that age, gender, marital status and, for younger drivers, academic performance all are accepted "predictors" of a motorist's potential for loss, though they don't bear directly on driving behavior.

Consumer advocates stress the weak causal link in credit-based scores and raise concerns that the poor, minorities or people in certain neighborhoods are put at a disadvantage by the use of credit reports--even if no discrimination is intended. Meanwhile, they say, it pushes insurance underwriting ever further from factors that point directly to a consumer's risk of loss.

The result has been a political battle, with states considering or imposing various restrictions on the use of credit-based insurance scores. A model law created by the National conference of Insurance Legislators has been gaining popularity as a middle ground in regulating the controversial practice without banning it.