Calif. AB 5 Revised to Ban Credit-Scoring

A California Senate bill amended recently would prohibit insurance companies’ use of credit-based insurance scores, which would force the vast majority of consumers to pay higher premiums, according to the National Association of Independent Insurers (NAII).

Assembly Bill 5, which passed the California Assembly last year and is pending before the Senate Insurance Committee, was revised last week to ban auto and homeowner insurance carriers from using credit information in rating and underwriting policies. The bill, authored by Assembly Insurance Committee Chairman Thomas Calderon, who was a candidate in this week’s Insurance Commissioner race, is not yet set for a hearing.

“AB 5 ignores the fact that federal law expressly authorizes insurance companies to use credit information to underwrite and rate policies,” Sam Sorich, vice president and western regional manager of the NAII, commented.

“In addition, AB 5 runs contrary to Proposition 103. The proposition requires that insurance rates be based on risk of loss, which is exactly what credit information does. There is an established correlation between credit information and risk of loss.” Sorich also noted that insurance scores work well with other underwriting criteria-such as insurance applications and motor vehicle records-to paint a complete picture of a consumer’s risk potential.

Nicole Mahrt, director of public affairs for the Western region of the American Insurance Association, agreed. “Representing the companies, we think that credit-scoring is an important tool used to accurately predict rates, and ultimately consumers are given better rates for their insurance credit scoring is an affordable, inexpensive, and very accurate predictor of law.”

“A blanket prohibition on the use of insurance scores will mean that the majority of California policyholders will pay more than necessary to insure their cars and homes,” Sorich added. “Why eliminate an underwriting tool that actually opens the door to more insurance availability and equity?”

Dietmar Grellmann, legislative council for agents & brokers at Norwood & Associates, offers another perspective.

“The problem with credit scoring, or the problem in the past has been that some companies have tended to abuse it,” Grellmann said. “Companies should really be in a position of defending how they use credit scoring. For those companies who have abused it in the past, the agent has gotten into the middle of what has turned into a very sensitive position between the insurer and the policyholder.

“We understand that there is value in credit scoring, and it appears to be predictive, but when we have to get involved in the sorting out of the inevitable fights that come up, that’s a problem.”

Insurance scores are used in a variety of ways to underwrite and price auto and homeowners insurance, but do not consider gender, race, income, or marital status. Instead, the scores reflect how responsibly a person manages his or her finances.

Topics California