“The NAIC as an institution has failed so miserably. It hasn't done anything on this for the last seven years,” he said at the meeting. “It has been missing in action. It failed miserably in putting forth policy issues about risk classifications,” he said.

Insurance trade groups at the session released a report that found credit scoring is an accurate predictor of risk.

According to Mr. Birnbaum, NAIC's inaction on this issue has made the insurance industry's arguments “the only ones on the table” in the credit-scoring debate.

“So when the industry goes to state legislators, legislators hear all these arguments from them and say, Well, who else can we go to for other opinions? But there isn't any. So instead of the NAIC producing some good products that legislators could look at as an alternative to what the industry is putting forth, there is a void,” Mr. Birnbaum argued.

He also asked the NAIC to develop a model that would do one of two things: “First, the NAIC could develop a model that bans credit scoring. Alternatively, they could develop a model that actually provides meaningful consumer protection if credit scoring is still going to allowed.”

Mr. Birnbaum also added that, at this point, “we don't think a new comprehensive study is necessary.” Already, he argued, there is enough evidence to show that credit scoring has disproportionate impact on poor and minority communities.

But a number of commissioners who were present at the meeting with Mr. Birnbaum took issue with his portrayal of the NAIC.

Mike Pickens, Arkansas insurance commissioner and president of NAIC, responded by saying 41 states have already dealt with credit scoring this year. “And 11 states have passed the NCOIL (National Conference of Insurance Legislators) model plus other consumer protections where the NAIC had input,” he said.

Commissioner Pickens said the NAIC has dealt with all of these issues, such as no-hits/thin files. The measures passed in these states say credit scoring can't be used as a negative factor for those who don't have much credit history at all, he explained.

“Also, other important consumer protection measures prohibit insurers from using credit information as the sole basis for increasing rates or denying, canceling or not renewing policies. It prohibits insurers from using factors such as income, race, gender, address, zip code, ethnic group and similar factors in the credit scoring formula,” Commissioner Pickens said.

“We would like to let people know that state regulators have worked with our state legislators to address the credit scoring problem,” said Mr. Pickens.

He also told National Underwriter, “Frankly, I think a total ban on credit scoring is unrealistic in most states. I think we are addressing the concerns, at least the immediate concerns regarding credit scoring, and we need to continue to look at the issue.”

Mike Kreidler, insurance commissioner for Washington state and co-chair of the NAIC credit scoring work group, also defended NAIC's approach on credit scoring.

“I want to make it clear that what we are doing is thoughtful,” Commissioner Kreidler said of his group's planning for the NAIC-sponsored or NAIC-organized study on credit scoring and its potentially disproportionate impact on certain groups. “Mr. Birnbaum suggested that we don't even need to do a study now. But I think a study still should be done,” Commissioner Kreidler said.

He also noted that his credit scoring work group was going to have a meeting this week in New York, “but we decided to cancel it because we wanted to make sure we had a well-thought-out proposal for how a study like this should be done,” he explained. “It was impossible to do it because we were still collecting additional information. We are anticipating holding that meeting at the fall NAIC meeting coming up in Chicago.”

One of the challenges in discussing credit scoring's impact is that no two companies use credit scoring in the same fashion, Commissioner Kreidler observed.

“Companies all have different methodologies for applying credit scoring and they don't all use it to the same degree. Some use it as a principal underwriting tool, but others use it as one of several. So it's very hard to make a general statement about credit scoring,” he noted. “So the study has to be very comprehensive.”

Still, Commissioner Kreidler acknowledged that a smaller study already conducted in his state has indicated signs of disproportionate-impact problems.

“We did a study in the state of Washington. In that study, there was a clear indication that the use of credit scoring had a disproportionate, adverse impact on low-income [cconsumers]. It also gave indications that credit scoring adversely impacted people of color,” he said.

“But we don't have a high degree of diversity in our state's population. We weren't able to do the study the way it should be done–you need a state that has a lot more diversity. In other words, our state tends to be too white, for example, on the question of race,” Commissioner Kreidler added.

That's why, he said, a NAIC study still needs to be done on a larger scale with more diverse populations to “really find out.”

“But there were indications that there were problems and we need a bigger study to resolve this issue.”

But for Mr. Birnbaum, the very concept of using credit scoring in the risk assessment process is troubling. And he argued the only defense of credit scoring by insurers is that there is some statistical relationship between credit scoring and the loss risk.

“But even if there is this statistical relationship, the use of credit scoring is so antithetical to the basic risk-spreading mechanism and antithetical to the public-policy goal of universal coverage and loss prevention–the very reason we have insurance,” he said.

Mr. Birnbaum also said the notion that a model doesn't specifically consider race or income doesn't mean anything. “Of course, it can still have disproportionate impact. A few years back, companies were using age and value of the home as underwriting guidelines. If your home was too old, if it was under certain value, companies didn't want to offer coverage,” he recalled.

Insurers said those were objective criteria and that they had statistics to back it up, he noted. “But the problem was, it was eliminating insurance in entire communities, economically disadvantaged communities, with bigger impact on minority groups.”

It was casting too broad a net, Mr. Birnbaum argued, and there may have been some low-value homes where consumers were taking really good care of them. “So the National Fair Housing sued, saying that this violates fair-housing laws. And companies stopped using those underwriting guidelines,” he said.

These guidelines didn't have anything to do with race or income, he added, “but they had a disproportionate impact by race and income. It's the same thing with credit scoring. Credit doesn't consider race or income, but it has a disproportionate impact by race and income.”

Mr. Birnbaum recommended that this is the place for legislatures to say, “You know, we have to draw a line even if there is a statistical relationship. We know there is a correlation, but as a matter of public policy, we are not going to allow credit scoring.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, June 30, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.