A collective of insurance trade groups joined credit information and economic experts seeking to promote to state regulators the benefits to consumers when they use credit-based insurance scoring, even in a tough economy.

Representatives of the American Insurance Association, National Association of Mutual Insurance Companies and Property Casualty Insurers Association of America recently testified at a special hearing of the National Association of Insurance Commissioners looking at the use of credit-based scoring in setting insurance rates.

Buoyed by numerous studies and public testimony from individual companies, insurers once again sought to make the point that credit-based insurance scoring is an objective, reliable underwriting and/or rating tool that benefits a majority of consumers.

Robert Hartwig

“Over the past 10 to 15 years, during which the use of insurance scoring has become nearly universal, the economy has experienced two recessions and enormous variations in economic growth and employment across states,” said Robert P. Hartwig, president and economist of the Insurance Information Institute. “Insurance scores have been proven to remain highly accurate predictors of future loss throughout the entirety of this period.”

Concerns about the validity of the credit information were addressed by Stuart K. Pratt, president and CEO of the Consumer Data Industry Association, who said a review of more than 52 million consumer credit reports showed that less than 2% resulted in disputed data being deleted because it was not accurate.

“Studies of credit reports done by the credit reporting industry and federal agencies over the last several years show that the information in credit reports is accurate, and reliable in assessing risk,” Pratt said.

A LexisNexis analysis of recent insurance score trends does not reflect an overall deterioration of scores. National insurance score trends have held steady over the past year for both the company’s Attract Auto and Attract Property scores. In fact, of the millions of scores processed by LexisNexis, a slight score improvement has been recorded over the past five years, according to experts who testified at the hearing.

Advocates said several insurance carriers have testified publicly in state legislative committees in recent years that 75% or more of their auto and homeowners customers receive discounts because of their good credit histories.

Participants in the hearing pointed to a government study, performed by the Federal Trade Commission in 2007, that indicated that when scoring is used, 59% of consumers would see premium decreases and “credit-based insurance scores are effective predictors of risk under automobile policies.”

“Self-styled consumer advocates bear the burden of proof to back their allegations that large numbers of consumers are harmed by credit-based insurance scores because the studies, today’s testimony and the fact that complaints remain low would prove otherwise,” said David Snyder, AIA vice president and associate general counsel. “The fact is a majority of consumers directly benefit from credit-based insurance scoring,”

Neil Alldredge, NAMIC’s vice president for state and policy affairs, said he hoped that “after reviewing this well-established rating tool, the NAIC will agree that what we’ve seen for more than the past decade remains true today: that credit-based insurance scores have led to more fair and accurate pricing for consumers through improved risk assessment for insurers.”

Deirdre Manna, PCI’s vice president of industry, regulation and political affairs, said that the regulatory climate of insurance makes it nearly impossible for insurance companies to abuse credit scoring when setting rates.

“Insurance is one of the most highly regulated industries in the United States, with laws and regulations in place to prevent insurance companies from charging consumers excessive, inadequate or unfairly discriminatory rates,” Manna said. “On top of that, any rating factor insurers’ use, including credit-based insurance scores, is subject to state and federal antidiscrimination laws. Regulators across the country for many years now have repeatedly approved the use of insurance scoring as actuarially justified and nondiscriminatory.”

Testimony indicated that insurers do not use credit-based insurance scores as the sole criteria in insurance underwriting or pricing decisions. Credit information is just one of several factors that go into the process. Other factors include driving record (prior accidents, moving violations), where a car is garaged, and age and type of car.

The majority of states prohibit insurers form using credit as the sole criteria in underwriting and pricing decisions.

Advocates for wider use of credit scoring said most state laws and regulations on credit scoring are based, in whole or in part, on the National Conference of Insurance Legislators (NCOIL) Model Law on Credit, legislation that includes several important consumer protection provisions. The model requires insurers to disclose their use of credit information, regulates what information can be used to calculate a score and requires insurance companies to re-underwrite and re-rate a policy if credit report information is amended through the credit dispute resolution process. A number of states also require companies provide exceptions in their use of credit information for anyone suffering an “extraordinary life circumstance” such as divorce, temporary unemployment or catastrophic illness or injury.