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Special Report: A Credit Scoring Battle Emerges in Washington

Posted By Administration, Tuesday, August 4, 2020

Washington State insurance commissioner Mike Kreidler is taking on the insurance industry and wants to ban insurers from using credit information and credit histories as a scoring tool for setting individual rates in auto, homeowners, renters and life insurance policies.

The PIA Western Alliance and other insurance organizations, and most insurance companies oppose the move. PIA Western Alliance Executive Vice President Clark Sitzes said, “We Are opposed. Credit scoring is a very accurate underwriting tool that helps get the best price for the insured.”

That opinion is shared by Kenton Brine who heads up the NW Insurance Council.

Like Sitzes, Brine says the use of credit scoring is a positive for most consumers and brings the cost of their insurance down. He points out there is an actuarial connection between credit-based insurance scores and the risk of actual loss. The better the score, the less the risk and the lower the premium rate.

Both Brine and Sitzes point out that without the use of these scores everyone’s insurance rates would be higher and Kreidler’s proposal — if enacted — will be a negative for consumers and for insurers.

“I think it’ll be highly disruptive to the Washington insurance market,” Brine said. “Most people have a credit history that is beneficial to their insurance position.”

Plus, Brine pointed out the way insurers use credit scoring is about “responsible behavior, not about how much you make.”

Kreidler began his proposal by reaching out to the heads of various insurance companies via a letter. He asked them to stand behind their pledges to end discrimination and racial inequalities and support his proposal to do away with credit scoring.

“Many leaders in the insurance industry have recently pledged to eliminate inequity,” Kreidler said. “My proposal is an opportunity to convert these pledges into action. People will feel the economic impact of the coronavirus pandemic for years to come. It will be extremely hard for many people to improve their credit scores or even maintain their current score. They should not be penalized for circumstances that are no fault of their own.”

He then tossed a proposal to the Washington Legislature and has asked it to amend two laws that set regulations on how insurance companies set their rates. Kreidler wants credit scoring eliminated but will still allow insurers to base rates on age, gender, where a person lives and marital status.

The PIA and the NW Insurance Council are not alone in their opposition to Kreidler’s proposal. The American Property Casualty Insurance Association (APCIA), the National Association of Mutual Insurance Companies (NAMIC) and the American Council of Life Insurers (ACLI) have all chimed in and say Kreidler’s proposal is a very bad idea.

One of the critics of Kreidler’s idea is Mark Sektnan. He is the vice president for state affairs of the APCIA. Sektnan thinks Kreidler — and Washington State — will be better off if it adopts the National Council of Insurance Legislators’ (NCOIL) model. It takes extraordinary life circumstances into account when setting rates and protects consumers who’ve had medical bankruptcies and other unforeseen financial circumstances.

Sektnan said nearly half of the states in the U.S. have adopted that model.

“The fairest way to determine what people pay for auto insurance is to use a variety of factors that provide insurers with a more complete picture of a consumer’s potential for filing a claim or having a loss,” Sektnan said. “Credit-based insurance scores provide most consumers with savings. The NCOIL model law can provide important additional consumer protections.”

The PIA Western Alliance’s Clark Sitzes agrees.

“To the consumer — and on the surface — Kreidler’s complaints about the use of insurance credit scoring sounds plausible,” Sitzes said. “However, credit scoring protects consumers more than harms them because insurers don’t use credit scores like banks and landlords and other companies do. It’s done much, much differently.”

Insurers use pieces of credit reports and then factor in items like a person’s driving history and the number of claims filed for drivers and the history of home ownership or rental to determine a rate.

“It’s not about profit, it’s about risk,” Sitzes said. “The idea is to lower rates and not raise them.”

Kreidler added that the elimination of this aspect of rate setting is also very much needed because of the impact of the COVID-19 pandemic on consumers. He predicts people are going to feel this financially for years and a lot of people with poor credit scores will not be able to repair them.

This — the commissioner says — is about leveling the playing field. Kreidler then pointed out that in Washington State 8% of whites live in poverty while 20% of blacks and 17% of hispanics find themselves in the same boat.

“It is very frustrating to have them be that judgment and that so far out of any sense of reality of what the real world is like out there for these people, and they’re hurting and they’re going to be hurting for a long period of time,” Kreidler said. “There are some institutional forms of racism that are inherit in our economy. The use of credit scoring is one of them.”

Brine disagrees.

“We didn’t see that in the 2008 recession, and early indicators we are not seeing that now,” he said. “The assumptions about race and income and this current situation with COVID are supposition. We think it’s a real mistake to just assume credit scores are dropping,”

Brine also pointed out there is a fallacy in the commissioner’s thinking that people of color are less responsible with their money that whites and that gives them poorer credit.

Kreidler’s proposal has generated interest in the Washington Legislature. Senator Mona Das of Kent said she’ll introduce a bill in the senate and Tacoma Democrat Steve Kirby is going to put one before the state’s House.

Source link: Insurance Journal

Tags:  American Property Casualty Insurance Association  APCIA  Clark Sitzes  credit scoring  credit scoring Washington State  Kenton Brine  Mark Sektnan  Mike Kreidler  NW Insurance Council  PIA Western Alliance  Washington Insurance Commissioner 

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