AIA: Unprecedented Fla. Credit Rule Could Hurt Insurance Consumers

The use of credit information in underwriting and rating Florida homeowners and auto insurance policies is now threatened by yesterday’s approval of a rule governing insurers’ use of credit-based insurance scores, according to the American Insurance Association (AIA).

“While the legislature passed a law in 2003, specifically authorizing theuse of credit information for insurance underwriting and rating, today’s administrative action by the Florida Cabinet may effectively ban insurers’ use of credit information,” said Cecil Pearce, AIA vice president, Southeast Region.

According to AIA, the rule, proposed by the Office of Insurance Regulation (OIR), goes far beyond what other states have done by requiring insurers who use credit information to meet a new “disproportionate effect” standard, which is contrary to both the letter and the intent of state and federal law. The rule will require insurers to demonstrate that there is no “disproportionate effect” on consumers when credit information is used in underwriting and rating.

“With this requirement, OIR may have effectively eliminated the use of credit information because insurers do not collect the demographic data necessary to prove that there is no disproportionate effect,” according to Pearce. “While OIR contends that it is protecting consumers with this rule, the reality is they may be denying, at a critical time, the use of a tool that is key to developing a healthy and competitive insurance market in Florida,” said Pearce.

AIA said it has been shown time and again that consumers benefit from the use of credit information in underwriting and rating. The use of insurance scores greatly improves insurers’ ability to predict future claims. When insurers use a consumer’s insurance score in conjunction with other underwriting factors, they can more accurately price a risk. Using credit information allows insurers to price more accurately, consistently, and efficiently, rewarding those who are less likely to have a loss. The use of credit information allows more consumers to receive appropriate rates, rather than potentially being declined.

According to AIA, although the Florida rule has now been adopted, the substance of the rule is already under review. Several insurance trade associations, including AIA, filed a rules challenge in 2005, and a hearing on the challenge is currently scheduled for April.

Topics Florida Carriers