Model Credit Bill Scores Big
Six months ago it was uncertain whether a consensus model credit-based insurance scoring bill devised by the National Conference of Insurance Legislators (NCOIL) with the cooperation of producers, carriers and consumer groups would carry the day in state legislatures around the country.
Since then 15 states have passed the NCOIL model bill—or something very close to it—to regulate insurance scoring, and to Candace Frick, NCOIL’s director of legislative affairs and education, that’s a measure of the bill’s effectiveness. “It’s clearly one of our most successful models,” she said.
According to the National Association of Independent Insurers (NAII), an industry lobbying group, states enacting legislation based on the NCOIL model include Arkansas, Florida, Georgia, Indiana, Kansas, Louisiana, Maine, Nebraska, Nevada, North Dakota, Oklahoma and Texas. Six states—Alaska, Arizona, Colorado, North Carolina, Virginia and Wyoming—passed bills that deviated from the NCOIL model. Of these states only Alaska and Virginia passed legislation that is more restrictive than the NCOIL model, while Maryland banned entirely the use of insurance scoring in underwriting homeowners policies last year.
California, which already bans the use of scoring for auto policies, is also considering banning its use in homeowners underwriting and rating. Two bills that would ban scoring passed the Senate but failed to get out of committee in the Assembly and so have been shelved until next year.
It appears that Insurance Commissioner John Garamendi may try to ban insurance scoring through regulatory means, as he has done with his emergency regulation on the use of the Claims Loss and Underwriting Exchange (CLUE) database. Both issues are key components of Garamendi’s “Homeowners’ Bill of Rights.”
Overall, though, the industry-backed NCOIL model, which steers a middle course between a free reign on the use of credit information limited only by the Fair Credit Reporting Act and an outright ban, has carried the day and probably will continue to do so.
“Because it was a consensus effort,” explained the Alliance of American Insurers’ Lynn Knauf, “it had every compromise the industry could throw in there. That was part of the reasoning behind biting the bullet.”
The model bill prohibits insurers from using credit information as the sole basis for denying, canceling or non-renewing a policy or increasing an insured’s renewal rates. It also prohibits insurers from taking an adverse action against an insured for not having a credit card account and requires them to consider an applicant with no credit history as having neutral credit.
The model bill also requires insurers to recalculate and re-rate a policy annually based on updated credit information at the request of the policyholder or the insured’s agent. The bill also prohibits insurers from basing their scoring on home lender inquiries or medical bill collection accounts.
Insurers must re-underwrite and re-rate a policy within 30 days of any corrections made to a credit report, and must notify the applicant that their credit information will be used and notify a policyholder of any adverse action taken based on credit information.
Lastly, the bill requires insurers to file their scoring models with the state, while the state guarantees that the models will be treated as trade secrets.
“We had to stretch a great deal with the NCOIL bill,” said NAII assistant general counsel Dan Snider. “A lot of companies had to change how they do things, but they recognized they needed to go along with it. There were certain types of information they didn’t want to give up using. On no-hit, no-scores, for example, a lot of companies feel that’s an unrealistic constraint of use of credit scoring in renewing.”
Still, insurers went along because they feared that an alarming number of states would follow Maryland’s path, which they claim would have only hurt consumers in the end.
“In Maryland,” Snider said, “you have fewer choices for consumers. It was consumers who were paying lower rates [because of good credit scores] who were hurt and are now paying higher rates.”
Not every model bill has this kind of success. It appeared that many legislatures appreciated NCOIL’s job of reducing the many complex issues involved into a fairly simple and comprehensive model.
“Once you got to the table, in the states you had this compromise effort ready for offering any substitutes,” Knauf said. “The agents groups were on board, and we already had a situation as things went forward where other states had passed similar legislation. So much of the debate was already done. How can you penalize someone on their insurance for medical bills? That’s already in there. For people who don’t have a credit score, that’s already in there. And a lot of the fine tuning of the wording is already in there.”
Whether this middle-ground approach is the last word on credit-based insurance scoring is of course yet to be seen.
“I would say that in a lot of states that because this represents a good compromise they’re going to wait to see the success of it, and it will prove very successful,” Frick said. “I don’t expect that in the states where it was adopted that they’ll move for a ban later on. The states that adopted it think this is the right approach.”
Illinois Rep. JoAnn Osmond, who sponsored the NCOIL-based legislation signed by Gov. Rod Blagojevich in July, doesn’t see things that way.
“I think it’s a first step,” she said. “I believe that there’s going to be more and more use of [credit scoring] and we need to make sure it’s used in the proper way. … It seems to me you have to start somewhere.”
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