Insurance News

Anti-credit Scoring Legislation is Anti Consumer, NAMIC Tells New Jersey Senate Committee

Posted on: May 13, 2009

INDIANAPOLIS (May 7, 2009) – A proposal to temporarily prohibit insurance companies from using credit-based insurance scoring to rate policies in New Jersey would lead to cross-subsidization and higher prices for most insurance consumers, the National Association of Mutual Insurance Companies (NAMIC) testified today. The state Senate’s Commerce Committee is considering S-2766, legislation that would suspend use of the underwriting tool until June 30, 2011.

“Presumably, the bill is meant to provide a benefit to consumers, and its temporary nature suggests it is somehow responsive to the current economic crisis. The effect of the bill, however, would be to hurt consumers, and it could actually unfairly force consumers already struggling due to the economic crisis to have to pay more for insurance,” Paul Tetrault, NAMIC’s Northeast state affairs manager told the committee.

Numerous governmental studies have underscored the use of credit-based insurance scores as valid and powerful predictors of claims and losses. In addition, a recent NAMIC policy briefing cautions against making unfounded assumptions on the use of insurance scoring in the context of the financial crisis.

“It notes that insurance scores have remained stable and points out that not all credit-related incidents, such as foreclosures and loan defaults, will affect insurance rating and underwriting decision-making,” Tetrault explained. “Significantly, it points out that where the financial crisis was itself caused by a failure by many to properly assess risk, it would be both ironic and inappropriate for it to result in the prohibition of a valuable risk assessment tool.”

The recent findings, combined with the many studies, suggest a ban on credit-based insurance scoring at this time would unfairly hurt New Jersey consumers by effectively forcing insurers to charge some insureds more than they would otherwise, NAMIC stated.

“Perhaps the most important misconception about insurers’ use of credit-based insurance scores is a fundamental one based on a failure to recognize that insurance is a very competitive business and insurers use insurance scores not to penalize but rather to compete effectively by offering products to more individuals at the lowest price possible,” Tetrault explained. “This notion should have particular resonance in New Jersey, which has experienced a dramatic turnaround in its auto insurance market thanks to competition that resulted from enabling insurers to assess and price risk appropriately.”

© Copyright 2007, National Association of Mutual Insurance Companies (NAMIC).

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