Credit-based insurance scoring is now a time-tested and common industry practice, extensively studied and consistently found to be a valid measure of risk. It has been reviewed by individual insurance departments and state legislatures as well as national legislator and regulator groups, and a majority of states have taken steps toward establishing standards for its proper use and to ensuring consumers are protected.

Given all of this, one might think that insurance scoring should be over as a public policy issue, that while it may show up as the subject of an occasional bill or two, there would be no substantial level of continued legislative interest in the subject. In fact, however, while there was a period of relative quiet extending over a number of legislative sessions, the past couple of years have seen a marked uptick in earnest interest. As of this writing, credit-based insurance scoring is expected to be a subject of substantial contention in a large number of states, and at the federal level as well, in 2009. Credit-based insurance scoring, it turns out, is an issue noted for its resistance to resolution. Strong But Not Intuitive The resurgence of legislative attention is a difficult issue to address: the fundamental fact that the connection between credit and risk of loss, while strong, is not intuitive. Add to that the substantial turnover among state legislators in 2006 and 2008, and you have a recipe for resurgence. Most people's initial reaction when they first learn that insurers use credit-based insurance scores in underwriting tends to be a mixture of surprise and suspicion. "What does whether I pay my bills on time have to do with how I drive?" is the classic question, asked not only by consumers but by legislators and regulators who are not familiar with the issue and its history. It is not that the question defies response, even if it misses the point to some degree. But it takes no small measure of informing and explaining to show a previously uninformed public policymaker how and why the use of a powerful predictive tool is beneficial for the proper functioning of a competitive insurance market, and ultimately for consumers. Indeed, the history of the issue is a tale of understanding triumph over misconception. The use of credit information in insurance underwriting was expressly authorized decades ago by the federal Fair Credit Reporting Act, but its use did not become significant until about the mid-1990s. When it was first reported that some large insurers used credit information to make underwriting decisions, there were significant cries of concern from legislators, regulators, consumer advocates and insurance agents. An Impasse Ended Though largely based on misunderstandings regarding how insurers used credit-based insurance scores and their effects on consumers, these concerns posed a significant obstacle when it was perceived that the only public policy response was to totally ban insurers' use of credit information. This apparent impasse was ended thanks in large part to the work of the National Conference of Insurance Legislators and the development of the NCOIL Model Act Regarding Use of Credit Information in Personal Insurance. In recognition of the salutary effects of insurance scoring, the NCOIL model does not ban or unduly restrict insurers' use of credit information. Instead, it establishes certain standards and limits on how insurers use credit information. For instance, it prohibits the use of credit information as the sole basis for denial, cancellation or nonrenewal. It limits the use of stale data and requires insurers to re-score consumers who request it. Significantly, given the state of the economy, it allows for exceptions for extraordinary events that may affect a consumer's credit rating. The result is a set of rules acceptable to most interested parties that provide assurances regarding consumer protection while also preserving insurers' ability to assess and price risk effectively. The NCOIL model has been immensely successful. To date, 26 states have enacted legislation based on it. And the vast majority of states have some sort of law or regulation in place to address insurers' use of credit in one way or another. But if NCOIL's model has been successful, it may be reasonable to ask, why is it that insurance-based credit scoring is expected to be a legislative challenge in 2009? The answer, as noted before, is the combination of legislator turnover and the lack of intuitive connection between credit and risk. Often the issue is raised by a new legislator who has probably never heard of NCOIL and may have no knowledge regarding whether his or her state has already addressed the issue, by enacting the NCOIL model or otherwise. An additional factor affecting the degree of interest in the issue is that the legislator turnover that has occurred over the past two election cycles has resulted in substantial gains among Democrats who may be less trusting when it comes to business practices and more inclined to pursue causes they view as pro-consumer. It was the 2006 change in party control of the U.S. House of Representatives that produced a push on the issue at the federal level. Last year, the 110th Congress considered two bills, H.R. 5633, the Nondiscriminatory Use of Consumer Reports and Consumer Information Act, and H.R. 6062, the Personal Lines of Insurance Fairness Act, that would have prohibited or severely restricted the use of insurance scoring in underwriting or rating personal automobile and homeowners' insurance. An Ongoing Task All of this legislative interest means the industry faces a substantial ongoing task of educating policymakers, rebutting myths and emphasizing the beneficial effects of credit-based insurance scoring. Fortunately, there is plenty of material to assist in this work, including studies by state insurance departments, actuarial firms and the Federal Trade Commission showing the predictive power of insurance scoring and highlighting the value of its role in the underwriting process. Perhaps the most compelling study is a rather simple one by the Arkansas Dept. of Insurance. It shows that more than 90 percent of consumers either benefit from insurers' uses of credit-based insurance scoring through lower premiums or see no change in the cost of insurance. The study shows that some consumers pay more, but those are ones with a higher level of risk. By showing that insurers' use of credit-based insurance scoring benefits many consumers, the Arkansas study gets to the heart of the issue and effectively dispels a material misconception. Some people assume when they first hear of credit-based insurance scoring that insurers use it to penalize insureds and applicants, to identify those with poor credit to deny them coverage or charge them more. The real purpose is quite the opposite. After all, insurers compete for good business, so they are generally interested in identifying and attracting applicants and insureds that present a relatively low risk of loss. By using insurance scores, insurers can have the confidence to extend offers of coverage to more applicants than they would otherwise and to charge some insureds less for coverage than they would otherwise. Public policymakers considering passing a ban or undue restriction on insurance scoring should understand that doing so may mean that a large percentage of insurance consumers will pay more than they would have otherwise for insurance coverage. Such a prohibition interferes with the contractual freedom of two parties, the insurer and applicant. In the case of a consumer with a good insurance score, by forbidding the insurer from using a proven and reliable tool to assess risk, the prohibition effectively forces the insurer to charge the applicant more. The expected resurgence in legislative interest in the issue will require considerable effort to educate and inform policymakers. But the value of credit-based insurance scoring is well established, and experience has shown that policymakers who do understand its role will not support excessive restrictions.