In the current legislative year, according to the Property Casualty Insurers Association of America, there have been 67 bill introductions in 24 states on the controversial topic, and the only two enactments were of proposals relatively favorable to the insurance industry.

“And there was a serious effort in only about 12 states,” said Neal Alldredge, state advocacy director for the National Association of Mutual Insurance Companies. Compare that to 2002, when there was serious legislative activity in about 40 states, along with proposals that were much more restrictive, he noted.

So, are the credit score wars over? For a topic that has generated such passion over the past 10 years, it is not surprising even raising this question sparks more disputes.

PCI's senior vice president, Joseph Annotti, is not quite ready for a celebration, noting that “credit scoring bills are the dandelions in the industry's legislative lawn–no matter how many times you kill them, they just keep coming back.”

However, he sees the issue–like the battles over territorial and gender-based rating before it–as maturing and evoking much less of an emotional response.

In his current role as insurance director for the Consumer Federation of America, Mr. Hunter still has a hard time believing the rationalization supporting credit scoring, and sees the tide turning his way despite much evidence to the contrary. “I am not discouraged at all. We are going to see state after state getting rid of this thing as it becomes clearer and clearer that this really does discriminate against the poor and minorities,” he said.

The potential for disparate impact on the poor and racial minorities has sparked more debate than any other facet of the controversy. The National Association of Insurance Commissioners spent several quarterly meetings debating whether or not to even study the issue.

One milestone in the debate was the release of a study by the Texas Department of Insurance earlier this year, which concluded that even though racial minorities have disproportionately lower credit scores than whites, their loss-predictive value was such that using them as an insurer underwriting criterion was justified.

Critics such as Birny Birnbaum, director of the Center for Economic Justice in Austin, Texas, remain unimpressed. “Credit scoring is a proxy for a prohibited [rating] factor–race,” he said. “Why should states allow the indirect use of a risk classification when the direct use is prohibited?”

All sides are looking to Washington and the Federal Trade Commission study on the practice to bring some finality to the question by the end of this year.

Robert Detlefsen, NAMIC's director of public policy, expects the study to replicate the Texas findings of disproportionate impact. However, he believes the prior court decisions establishing a “legitimate business justification” in similar cases will more than carry the day for the industry in continuing to use the practice.

Oregon Insurance Administrator Joel Ario–who served as one of the NAIC's point men on the issue for a couple of years–is not yet willing to buy the “legitimate business use” argument. In addition, he feels the FTC study–which will be more broad-based than the one in Texas–could put heat on the industry if its disparate impact proof is telling.

As for the overall debate, Mr. Ario has seen the number of credit-score related complaints “go down dramatically,” but that is a result of his state's stricture that the practice is sanctioned only for new business–which is certainly not the case in most states.

If it is premature to declare the credit score debate over, the real question then comes down to both the quantity and kind of legislative packages introduced in the coming years to give some indication as to the practice's ultimate fate.

Today, Maryland bans the practice for homeowners insurance, while California does so as well as a result of Proposition 103 authority granted to the insurance commissioner, John Garamendi, who is an ardent foe of the practice.

Candace Thorson, director of legislative affairs for the National Conference of Insurance Legislators, said the fact that 26 states have adopted either laws or regulations based on the NCOIL model have helped calm the waters. “Though efforts are being made to ban or severely limit the practice, it seems there is a greater acceptance of using credit information for underwriting and rating,” she said.

Today the debate will be centered on the regulatory details imposed by commissioners. The Republican takeover of statehouses in Missouri and Indiana last year made those states much more conducive to the practice, while long-awaited auto reform in Massachusetts could pave the way for its introduction there.

Mr. Annotti sees the interpretation of rules as the next logical focal point of the debate. “There may be significant differences of opinion in states with elected insurance regulators or with regulators who have political ambitions,” he said. “This is an issue that can easily be exploited to grab quick headlines, and as you know, insurers are always a convenient topic.”

The courts could also prove to be the next battleground. However, so far the sole effort by Michigan Insurance Commissioner and credit score foe Linda Watters to ban insurer use of credit scores through regulation have met with resistance from a trial court judge, who in essence endorsed the practice. The case is on appeal.

On the agent side, fewer complaints about the practice than just a few years ago are flowing into the Independent Insurance Agents & Brokers of America, according to its senior vice president, Wes Bissett. “This can be attributed to reasonable legislation enacted in many states as well as changes the companies have made proactively,” he said.

However, Timothy Kovach, director of business and compliance affairs for the National Association of Professional Insurance Agents, still sees many regulations that are burdensome.

For example, the rule that an agent providing anything other than a “best price” may trigger adverse action requirements is a case in point. “Because independent agents may not have any carriers in a particular state that offer the 'best price,' one can see how this issue is more complicated than it seems at first glance.”

One reason the stakes are so high for the industry is that credit scoring will play an even more critical role in personal lines underwriting as rating tiers go from the single digits to the hundreds with the addition of new elements. Thus, pioneers in this endeavor–including Progressive and Allstate–may gain that ever-elusive competitive edge, industry analysts suggest.

David Snyder, assistant general counsel for the American Insurance Association, is among the industry representatives downplaying such talk. “Credit scoring has enabled companies to write in the personal lines area much more than they otherwise would have,” he said.

Mr. Annotti added that with most companies using credit in one way or the other, “the bloom may be off this rose as far as gaining a significant advantage in the marketplace.”

Others stress in vivid terms the importance of credit scoring and more personalized underwriting in the future.

Kelly Whaley, whose Orem, Utah-based InsurQuote–a subsidiary of ChoicePoint–markets competitive pricing data to personal lines companies to help them develop their overall rating structures, asserted that in terms of painting a picture of a personal lines risk, “some companies are finger-painting while others are painting a Mona Lisa.”

A study put out last year by McKinsey and Company noted that in a survey of 10 of the largest personal lines writers, Progressive produced 7,776 different quotes for a group of customers, while the last-placed company in the group, Nationwide, produced only one.

The embrace by the number-one writer of personal lines insurance in the country–State Farm–of a tiered-pricing system last month in the wake of its loss of market share underscores the potential importance of credit scoring in the years to come.

State Farm's relatively late arrival to the party came about because of market pressures, according to Jay Gelb, senior property casualty analyst at Lehman Brothers. “Our sense is that the company is being adversely selected in the marketplace,” he said. In addition, he sees competitors such as Progressive and Safeco as having a distinct advantage in the immediate future.

Indeed, the widening adoption of credit scoring as an underwriting and pricing tool has benefited consumers, industry players say. “The market innovations that have been put in place have benefited the public in terms of more choices of insurance companies, more accurate pricing and more pricing options, and an overall improved personal lines market that has benefited the public,” according to Mr. Snyder.

However, there are still those consumers who react like that Texas lady in 1994. “We have seen that credit scoring is simply a tool for insurers to increase their profit. The advent of credit scoring has resulted in increased profits for insurers,” according to Mr. Birnbaum. “The issue will keep coming back because the vast majority of consumers don't like credit scoring and know it is an unfair practice.”

Caption for shot of hand holding (or just a bunch of) credit cards….

After more than a decade of debate over the need for, and fairness of, the use of credit scores to help price insurance, nearly half the states saw bills introduced to regulate the practice this year, but only two passed–both favorable to insurers.

Flag: Point/Counterpoint

Head: Credit Scores Spark Debate

“Credit scoring has enabled companies to write in the personal lines area much more than they otherwise would have.”

David Snyder, Assistant General Counsel

AIA

“I am not discouraged at all. We are going to see state after state getting rid of this thing as it becomes clearer and clearer that this really does discriminate against the poor and minorities.”

J. Robert Hunter, Insurance Director

Consumer Federation of America

“Credit scoring bills are the dandelions in the industry's legislative lawn. No matter how many times you kill them, they just keep coming back.”

Joseph Annotti, Senior V.P.

PCI

“We have seen that credit scoring is simply a tool for insurers to increase their profit…The issue will keep coming back because the vast majority of consumers don't like credit scoring and know it is an unfair practice.”

Birny Birnbaum, Director

Center for Economic Justice