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Car Insurance Credit Scoring Model Law

A car insurance credit scoring model law for state legislators to reference has long been an item of interest to the National Association of Insurance Commissioners (NAIC). Regulators at different levels have shown interest in the industry's use of credit based insurance scoring for most policies from general coverage to emergency services car coverage, and lawmakers across the country have attacked the practice with varying levels of success in recent months and years. The credit scoring model has been in place throughout the industry since at least the 1980s, and industry leaders say it is an extremely accurate predictor of driving performance and claims frequency among drivers. But critics have contended for some time that it unfairly discriminates against low wage earning drivers and that credit and driving performance aren't really tied directly together at all.

NAIC Annual Summer Meeting

In August of 2010, members of the Property and Casualty Insurance Committee at the NAIC's annual summer meeting sat down and reviewed actions they might take regarding the use of credit scoring in auto insurance underwriting practices. Critics of the insurance credit scoring model presented their arguments to the committee, including Melvin "Butch" Hollowell, insurance consumer advocate from the state of Michigan. The state has been embroiled in a battle over the use of credit to set rates for car insurance. Hollowell argued that credit scoring adversely affects policy holders during difficult economic times. If a worker is laid off, for example, and having a hard time paying bills, their credit score drops through no fault of their own and thus, their insurance rates climb when they can least afford it, according to Hollowell [1].

Critics went on to charge that in areas that experience cyclical downturns in the economy, credit based insurance scoring unfairly targets those who have been affected by economic troubles. They also openly question whether the scores are even accurate across the board. But proponents of credit based auto insurance scoring say that the opposite is true. Thomas Sullivan, the insurance commissioner for the state of Connecticut, appeared before the Committee to argue in favor of the practice. He disputed Hollowell's claims, saying that credit scoring provides a valuable tool for underwriters. Sullivan presented data from his home state to back up his argument. Interestingly, Hollowell pointed out the difficulty in comparing Connecticut with Michigan as far as auto insurance credit scoring is concerned, since Michigan insurers use it so much more broadly. In fact, he noted a state Supreme Court decision that limits the right of the state insurance commissioner to scale back the use of credit scoring in Michigan [1].

Debate over NAIC Model Law

At the summer meeting, critics on both sides debated back and forth about the merits of an NAIC model law to regulate the use of credit scoring as an underwriting tool in the auto industry. On one side were those who said that regulators in the industry should not be regulating something that is already being regulated by the federal government. The implication is that since credit scores and the work of the various credit agencies are reined in by federal regulations, these numbers are reliable enough that their usage should not require further regulation.

On the other side were critics who said that regulators not only had a right, but a responsibility to oversee a reporting agency that can have a dramatic impact in the financial lives of consumers across the country due to the effect this method has on obtaining free car insurance quotes. Those against the model law basically questioned its necessity, while those who were in favor were attempting to explain that very necessity.

The committee went ahead with its work developing the model law [1]. The NAIC from time to time comes up with these resolutions or model laws as an attempt to aid state level legislators in their efforts to create legislation for introduction in their home states. These model laws are in way binding, but they do often provide a framework for legislators to work with when they take up issues in their respective territories.

Car insurance credit scoring continues to be a hot topic, and one that is evidently not going away anytime soon. In the state of Michigan, for example, even the decision of the state's highest court has not prevented consumer advocates from continuing their lobbying efforts on behalf of auto insurance reforms targeted at the use of credit scores in policy underwriting.

Proponents of credit based insurance scoring have long held that its use increases industry ability to accurately predict claims, and that it actually saves people money on their premiums more often than not. But those who are against it remain steadfast. As the issue continues to develop and evolve, it will be interesting to witness how legal battles in various states over credit based car insurance scoring laws play out.

[1] http://www.naic.org/index_committees.htm Retrieved 2010-08-21.

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