For the past couple of decades, insurance companies have been using credit scores to set premium rates, saying that a person’s score can serve as a fairly accurate predictor of whether he or she will be more prone to accidents or will file more claims on a homeowner’s insurance policy. Insurers have come to rely on credit scoring, and the companies that compile the data characterize their information as accurate and fair.
However, according to consumer advocates, using credit scores in an economy that has seen millions put out of work and into foreclosure is unfair and subjects consumers to unreasonable rate increases. Some insurance commissioners, too, have been very outspoken about their perception of credit scoring, characterizing it as discriminatory and inaccurate.
When NAIC issued a data call for specific information to help determine whether credit scoring was a fair factor in underwriting and in setting rates, and to consider whether those who provide credit data ought to be regulated, insurers and credit data providers rose up in rebellion.
According to comments filed by FICO with NAIC, several factors are taken into account for FICO Credit-Based Insurance Score models, all of which the company says may indicate more frequent or higher insurance losses: payment history; amounts owed; length of credit history; new credit; and types of credit in use. FICO also says that these factors are affected by state laws.
The National Conference of Insurance Legislators (NCOIL) came up with a model for credit scoring in 2002 that has been adopted by 27 states so far, according to a letter sent to NAIC on Sept. 21 that objected to the data call.