Too Hot to Handle’

The controversy swirling around the use of credit-based insurance scores in underwriting auto and homeowners policies is one that Insurance Journal has touched upon with increasing frequency during the past few months. But going into 2002, what has happened most recently is a veritable explosion of legislation across the country dealing with the issue. In short, it has become as one trade association put it, a “white hot” issue. Expectations are that roughly half of the states in the U.S. will consider legislative proposals to ban or restrict the practice this year.

In the state of Washington, legislation was introduced which opponents believe would severely restrict the use of credit scoring and underwriting, and then apply a 20 percent rate cap between the price differential that could be charged using credit scoring as a factor. During state House and Senate committee hearings during the last week of January, both sides presented their cases, and currently the industry has agreed to some restrictions on the underwriting side. But there are still ongoing discussions and disagreements over the ratings component of the legislation.

Washington isn’t the only hotbed of controversy. For example, in both Arizona and Indiana, several bills related to this issue have been introduced. In Colorado, two credit-scoring bills recently bit the dust.

Some industry insiders believe there are several reasons that account for this legislative phenomenon. First, they note that a couple of years ago, a majority of companies were not using credit scoring. But now the companies have seen through competition how effective it is— those that were not using it found they have been adversely selected in the marketplace. Therefore, perhaps as many as 90 percent of companies now use it.

Secondly, a number of companies have started using it on renewal as opposed to just using it for new business. The third factor, some say, is the industry has not done an adequate job of educating agents about the implications of the use of credit scoring.

A tough question being wrestled with now is, ‘What should agents know?’ Agents want to be able to help the policyholder or applicant better understand why something’s happening. On the other hand, how comfortable are agents going to be if they’re privy to so much consumer information. And would the consumer want them to know that information? Agents tend to vary from state to state as to the way they view the issue.

Proponents of the use of credit scoring describe it as an extremely accurate and proven predictive tool. However, those proponents also believe that because it’s something many people are encountering for the first time, such newcomers are recoiling from it.

As this important issue continues to be battled in various state legislatures, Insurance Journal would be interested in knowing our readers’ opinions on the subject. Please send all correspondence to ctapia@insurancejournal.com.

Topics Agencies Legislation