Our efforts to protect insurers' ability to consider credit information have not been strictly defensive in nature. PCI worked with leading carriers in Alaska to secure a legislative fix that would allow insurers to continue to use credit information in the underwriting and rating of personal insurance for more than 2 years beyond initial issuance of the policy. And in Kansas, we testified in support of legislation that would replace the state's existing “best rate” trigger for sending out adverse action notices with the more standard increase in premium measurement. We are well aware of the confusion (most likely soon followed by anger) the “best rate” standard causes policyholders when they receive adverse action notices even when they save money because of the use of credit information and are working to remedy this in the small minority of states that still use “best rate.”

We remain vigilant in defending underwriting freedom year after year, not just for the benefit of insurance companies and agents and brokers, but ultimately for consumers. The more actuarially justified information insurers can consider when underwriting and rating insurance, the more consumers benefit with premiums that accurately reflect the true level of risk they represent, which means less generic (and necessarily lower) prices. That credit is one of the most, if not the most, predictive factor currently available to insurers has been affirmed by numerous studies:

1. December 2009: A St. Ambrose University survey commissioned by the Iowa Consumer Advocate observes, “We think the current evidence for the predictive power of insurance credit scoring is overwhelming.”
2. July 2007: A Federal Trade Commission study concludes, “Credit-based insurance scores are effective predictors of risk under automobile policies. They are predictive of the number of claims consumers file and the total cost of those claims. The use of scores is therefore likely to make the price of insurance better match the risk of loss posed by the consumer. Thus, on average, higher-risk consumers will pay higher premiums, and lower-risk consumers will pay lower premiums.” The study also observed that insurance scoring results in 59 percent of consumers enjoying a decrease in their premium.
3. June 2003: EPIC Actuaries conducted a study based on a nationwide sample of 2.7 million automobiles and found that insurance scores are unquestionably linked to consumers' propensity for auto insurance loss.

That consumers benefit from the use of credit information is confirmed by an annual survey published by the Arkansas Insurance Department. Issued since 2005, the survey consistently finds that approximately 40 percent of consumers in the state enjoy a decrease in their insurance premiums due to the use of credit information, while only 10 percent pay more. Premiums for the remaining 50 percent of the population is otherwise unaffected. And in a 2005 study, the Texas Department of Insurance commented, “By using credit scores, insurers can better classify and rate risks based on the difference in claim experience.”

What happens to prices when insurers are not allowed to use credit information? After Maryland banned the use of credit information for homeowners' insurance in 2002, rates went up at a significantly faster rate than in the rest of the country and in neighboring states.

The bottom line is that credit-based insurance scoring works, and it saves most consumers money. It is vitally important that everyone with a stake in the ongoing battle over underwriting freedom continually and consistently press these points and these studies when meeting with policy makers.

Although we have enjoyed a number of successes so far in 2010, we still face challenges. There are ongoing efforts by certain Delaware Senators to ban the use of credit, and in Michigan, there is an impending decision from the state Supreme Court on the validity of credit ban regulations.

We also face an ongoing threat at the federal level, where a number of legislators continue to take issue with the notion of using credit information to set insurance rates. While there is no ban legislation currently pending in Congress, we anticipate a hearing in the House on both credit scores and credit-based insurance scores sometime before July.

Agents and companies alike should continue to talk to legislators and remind them that credit-based insurance scoring is accurate and saves consumers money. It is also objective and blind to consumers' race and income levels because insurers are legally prohibited from considering these factors when calculating insurance scores. Such scoring only measures risk-relevant variables such as payment history that are indicative of potential future risk.