Will the NAIC See a Credit-Scoring Shadow?

At times during the National Association of Insurance Commissioners' recent national meeting, it was hard to tell if one was in San Diego or Punxsutawney, Pa.

It sure seemed like "Groundhog Day." Much like in the Bill Murray film, regulators and other attendees found themselves reliving the same moments session after session, day after day. In their case, it was the issue of credit-based insurance scoring.

First the Consumer Liaison Committee covered it. Then the Executive Committee took a turn. Later, the Property and Casualty Insurance Committee and the Market Regulation and Consumer Affairs Committee each had a run at it.

To no one's surprise, consumer advocates and insurance representatives continued their ages-old disagreement on the issue. The former sees the use of credit scores in rating and underwriting as an inherently discriminatory and unfair practice. The latter sees the use of credit data as an essential and accurate underwriting tool that produces lower rates for most consumers.

Industry representatives confess to a certain amount of frustration on the topic. Deirdre Manna of the Property Casualty Insurers Association of America said no one wins when an issue is fractured across multiple NAIC forums; they become harder to monitor and it's more difficult to forge consensus.

In the midst of the "Groundhog Day" experience, insurance commissioners made plans more out of a 1940s musical than a 1990s comedy -- "let's put on a show!" The Property and Casualty and Market Regulation committees will hold a joint public hearing on credit scoring. Those on each side of the issue hope the hearing will provide direction for the NAIC and lay to rest credit-scoring myths -- the arguments of the other side, naturally.

The sorry state of the national economy is fueling the current rise of this ebbing-and-flowing issue, with multiple states including Minnesota, Connecticut and Michigan seeing aggressive legislative and regulatory battles this year. To consumer advocates, rising unemployment and foreclosures are putting consumers at risk of falling credit scores -- and higher insurance rates. To insurers, that fear is not being reflected in hard numbers and many companies are adjusting rating tiers due to the economy. Besides, they say, credit scores are only a piece of what goes into an insurance score (along with territory, age and driving records, for example).

David Snyder of the American Insurance Association said there is a danger in actions to block credit scoring. He said personal-lines insurers are a rare bright spot in the financial-services sector -- in part because they use cost-effective risk-management tools like credit scoring -- unlike, say, subprime mortgage lenders.

Snyder asked, "It ain't broke, so why break what's working well?"

Butch Hollowell, Michigan's official insurance consumer advocate, said insurance scoring is really a proxy for income. He said credit scores can vary by as much as 40 points, depending on which credit bureau is cited, which can make a big difference.

The NAIC is taking a "reasonable middle ground" in holding the hearing, Snyder said. The NAIC has to be seen to address what has become a significant political issue, he said. Snyder is confident the NAIC won't find proof of bad business practices, a higher number of complaints, or discrimination.

NAIC-designated consumer reps hope the hearing will force insurers to prove their claims of the practice's benign nature.

To paraphrase both sides, "bring it on."

The NAIC has not yet scheduled a date and location for the public hearing. It's a safe bet it won't be in Punxsutawney.

(By Sean P. Carr, senior associate editor, BestWeek: Sean.Carr@ambest.com)