Florida CFO Weighs In Against Credit Scoring

Mar 19, 2009

National Underwriter–March 19, 2009


Florida Chief Financial Officer Alex Sink said she is “unimpressed” with auto insurers’ justifications for using credit information in determining rates, and she voiced support for bills that would ban the practice.

In a press briefing today, Ms. Sink noted that in the current economy, consumers’ credit scores could be lowered through no fault of their own, and that could adversely affect their insurance rates.

She cited lost jobs and increased debt as examples of economically-driven factors that could affect credit, and she added insurers “should not be kicking Floridians when they’re down.”

Ms. Sink added she has asked insurers why they feel the need to use credit information, “And frankly I have been very unimpressed with their reasons.”

Sean Shaw, appointed by Ms. Sink last year as Florida’s Consumer Advocate, said insurers have countless other rating factors they can use besides credit, such as age, accident history, and type of car. These factors, he said, are more directly related to driving history.

He added that insurance companies feel they can use any attribute as a rating factor as long as their actuaries can justify it, “and I think that’s wrong.”

A spokesperson for Ms. Sink verified that the Florida CFO would support bills introduced in the Florida Legislature by Senator Ronda Storms, R-Valrico, and Rep. Priscilla Taylor, D-West Palm Beach that would ban the use of credit, as well as education and occupation, as rating factors for auto insurers.

The spokesperson also said Ms. Sink would support any rule from the Office of Insurance Regulation (OIR) that might stem from credit scoring hearings held last month.

The issue of credit scoring received renewed attention at the National Association of Insurance Commissioners (NAIC) Spring Meeting held this week in San Diego. Florida Insurance Commissioner Kevin McCarty helped make the case for a new NAIC hearing that will examine how the use of credit is affecting consumers in the current economy.

The hearing, to be held jointly by the NAIC’s Property-Casualty Committee and the Market Regulation and Consumer Affairs Committee, is expected to occur sometime in April.

During a media briefing at the NAIC conference, representatives for the Property Casualty Insurers Association of America made their case in support of using credit information as a rating factor, noting that it is one of many factors used that is a true predictor of loss.

PCI spokesman Jeff Brewer said it is too simplistic to say the bad economy automatically leads to lower credit scores, and he and other PCI representatives said a recent Wall Street Journal article actually indicated that credit scores are improving for some people as they conserve more money and pay off debts.

Mr. Brewer said in an interview today that sometimes people make an automatic linkage between the economy and credit scores, but the issue, in terms of how people manage their finances, is more complex.

Regarding life-changing circumstances that alter consumers’ credit, Mr. Brewer noted that the National Conference of Insurance Legislators credit scoring model already contains certain exceptions for extraordinary circumstances.

During the February OIR hearing, insurers who were subpoenaed also testified that they have procedures in place to account for life-changing, credit altering events beyond a consumer’s control.

Mr. Brewer said throughout the last few years around 20 to 25 states have bills that look at the issue of credit scoring each year, and he said this year’s legislative activity is consistent with that.

He said the renewed focus by regulators is new, however, and is probably tied to the economy.

American Insurance Association Vice President and Associate General Counsel, in reaction to Ms. Sink’s comments issued a statement that said in part, “Auto insurance rates could actually increase for the vast majority of Florida drivers if insurers were unable to use credit-based insurance scores. Statistics show that today over 59 percent of policyholders nationally, and by some company public testimony, upwards of 75 percent of their customers, pay lower premiums because of insurers’ use of credit-based insurance scoring.”