Wash. Bill Restricting Credit-Based Scores Awaits Gov.’s Signature

The state Senate has passed legislation restricting insurers’ use of credit-based insurance scores in Washington. House Bill 2544 passed the Senate March 4 by a 36 to 11 vote and now goes to Gov. Gary Locke, a co-requestor of the legislation, for his signature.

“The NAII believes this legislation is bad public policy that will harm Washington’s insurance marketplace,” Michael Harrold, National Association of Independent Insurers (NAII) northwest regional manager, said. “The legislation will deny the majority of Washington policyholders the discounts they deserve and threatens to reduce competition and make insurance less available.”

The legislation’s ultimate passage was guaranteed when the House passed HB 2544 on Feb. 18. A request then was made of the Senate to pass the House bill without further amendment, thus effectively closing off debate on the measure. HB 2544 was passed out of the Senate Labor, Commerce and Financial Institutions Committee on Feb. 28 without further hearing or debate and passed the full Senate this Monday.

“While some in the industry have attempted to put a positive spin on the legislation once its final passage was virtually assured several weeks ago, the NAII cannot in good conscience put a ‘happy face’ on legislation that we continue to believe is fundamentally flawed,” Harrold said. “HB 2544 is experimental public policy that will impact the premiums of hundreds of thousands of Washington policyholders, many of whom will be forced to pay higher premiums because a favorable and extremely predictive loss factor has been neutered.”

The legislation as originally introduced contained a rate cap that would have resulted in lower-risk policyholders being charged startlingly higher premiums in order to subsidize higher-risk policyholders. Substitute bill language removed the controversial rate cap and replaced it with specific restrictions on the components that could be considered in an insurance scoring model.

“Proponents of this legislation will proclaim it to be pro-consumer,” Harrold said. “What they cannot tell you is the level of premium subsidies that will have to be borne by consumers who are least likely to suffer losses.”

The legislation prohibits insurers from cancelling or nonrenewing policyholders in whole or in part on credit history or insurance score, and allows insurers to deny personal insurance only in combination with other “substantive” underwriting factors. The bill also lists a number of credit characteristics that can not be considered or are limited in their use in underwriting and rating. The characteristics include: the absence of credit history; number of credit inquiries; collection accounts identified with a medical industry code; the initial finance or purchase of a vehicle or a house; use of a particular type of credit, charge or debit card; and total available line of credit.

“This legislation will produce unintended and unfair consequences,” Harrold asserted. “Just one example comes from the proposed exclusion from scoring models of medical collections that are identified by an industry code. The legislation fails to recognize that people confronted with similar medical predicaments will choose to respond to them in different ways.

“The legislation creates a situation in which those individuals who increase their debt in an effort to responsibly pay off their medical bills (i.e., by paying with a credit card or taking out a personal loan or a second mortgage) might ultimately pay more for insurance, while an individual who simply fails to pay his medical bills might pay less for their insurance.”

Harrold said the underwriting restrictions in the legislation will have a particularly negative effect on smaller insurers and their customers because those companies do not have the sophisticated rating and tiering programs that most larger insurers use to place and price their customers. The legislation locks in an adverse selection situation by law and will force more bad business onto smaller insurers books. It places smaller insurers at a competitive disadvantage and reduces consumer options and choices in the insurance marketplace.

“Numerous studies and the experience of insurers have shown conclusively a very high correlation between insurance scores and the likelihood that a person will submit an insurance claim in the future,” he asserted. “When insurers are free to use those scores as their experience dictates, they can provide insurance to more people, at a lower cost to most of them, and people who are low risks don’t subsidize higher risks. That is fairest to everyone, and it is unfortunate that HB 2544 will impede that process.”

Topics Carriers Legislation Washington