North Dakota’s SB 2186 Should Be a Template for NAIC Model

Thanks to the leadership of Commissioner Jim Poolman, North Dakota insurance consumers now have common sense protections against unfair underwriting and rating actions by insurers because of information in loss history databases, such as CLUE and A-Plus. While the consumer protection provisions of North Dakota SB 2816 are just common sense, the legislation represents–incredibly–a quantum leap from the current situation in every other state where consumers are routinely victims of unfair practices by insurers based on information in a claims database.

What are the “radical” provisions of SB 2816 that have sent the industry into hysterics? An insurer cannot use a consumer’s inquiry about their policy or coverage as a claim against the consumer; an insurer cannot use a claim settled without payment against a consumer; and an insurer cannot use a wind or hail claim against a consumer unless it is the second such claim within five years or unless the insurer can demonstrate the consumer failed to maintain the property and the such failure contributed to the loss.

In addition, an insurer cannot use a claim more than 10 years old against a consumer unless the insurer can demonstrate the consumer failed to maintain the property and the such failure contributed to the loss; and an insurer can not use the claim history of a property not previously owned by the consumer unless the insurer can demonstrate the previous owner did not repair the damage.

Most readers–who don’t work for insurers–will look at this list and ask why an insurer should be able to use any catastrophe claim against a consumer. After all, why should a consumer be penalized for being the victim of a catastrophic weather event?

For most readers, the most remarkable aspect of SB 2816 is the knowledge that insurers were actually engaged in the prohibited practices. Yes, insurers were surcharging and denying coverage because of a consumer inquiry about his coverage. Insurers were denying coverage to a consumer purchasing a home because of prior claims on the property without any inspection by the insurer to determine if the property was or was not in insurable condition. Insurers were surcharging and denying coverage because of not-at-fault, catastrophe claims.

What is even more remarkable is the absence of legislative and regulatory action in almost every state to stop these abusive practices by insurers.

This is clearly an area for the National Association of Insurance Commissioners to take action by quickly developing a model law based on the North Dakota law. The development of such a model should be a no-brainer for the NAIC because such a model would respond to an urgent consumer protection issue and promote uniformity across the states.

We can only hope that the NAIC does a better job with loss history databases than it has done with credit scoring. As with credit scoring, the National Conference of Insurance Legislators is developing a claims history database model that provides no consumer protection and allows insurers to continue abusive practices. When the NAIC failed to come up with its own credit scoring model, the industry-friendly NCOIL model was the only option before most state legislators.

The NAIC must not repeat the credit scoring debacle with loss history databases. If the NAIC’s claim that its number one mission is to protect insurance consumers has any meaning, the NAIC must develop a strong loss history database model law that contains at least the same protections as the North Dakota law.

But the NAIC and state insurance regulators need to take a further step, too. Insurers are obtaining all sorts of consumer information and will only increase the amount of information in the future. Already, insurers are seeking to obtain information from automobile black boxes about consumer driving practices and using voice analysis software to determine when consumers are “truthful” or not.

What’s needed is a different approach to regulating what types of information insurers can use for underwriting, rating and claims settlement. Instead of allowing insurers to use any and all types of information in any way they please until a regulator, consumer or legislator happens to discover an abusive practice, the new approach should be to allow the use of information–new risk classifications–only with prior approval of the insurance regulator.

This regulatory approach is justified by a clear market failure–insurers pursuing their rational self-interest undermine critical public policy goals for insurance. It should be obvious that the market forces that encourage an insurer to use an inquiry against a consumer do not promote the insurance public policy goal of loss prevention, for example.

The advent of credit scoring was a watershed in the insurance industry because it created a revolution in the way that insurers collect and use data about consumers. This revolution in the amount of information about consumers and the ability to use that information could benefit consumers by leading to major advances in loss prevention. But this revolution will only benefit consumers if there are substantive public policy discussions and decisions before insurers can use that information. Developing a model law to regulate insurers’ use of loss history information is an essential start.