Provided to the Florida Insurance Council by Property Casualty Insurers, a national property & casualty insurance company trade association.

Posted on the FIC site on July 3, 2007

The Office of Insurance Regulation's (OIR) newly proposed insurance scoring regulations focus attention on insurers' use of this important underwriting tool.  Although numerous independent studies confirm the existence of a statistically significant correlation between likelihood of insurance loss and an individual's insurance score, these proposed regulations will severely limit if not eliminate the use of insurance scoring in Florida. 

The new regulations replace previously proposed regulations invalidated by an administrative law judge earlier this year.  Substantively, the new edition represents the same threat to the use of insurance scoring that the previous version represented and raises many of the same concerns.  We see this new rule as an attempt to ban insurer use of credit-based insurance scoring, despite the fact that Florida and federal law expressly allows for such use.

It is important to understand that there are significant differences between the credit scores used by lenders and the credit-based insurance scores used by many insurers. Although both are derived from information contained on consumer credit reports, each represents a different measure of that information.  Insurers use credit information to calculate insurance scores to predict the likelihood of future insurance loss. Credit-based insurance scores provide an objective measurement of how one manages risk * as illustrated by management of one's credit risk. Lending institutions use credit to determine the likelihood of repayment.

Income, address, ethnicity, religion, gender, familial status, nationality, age and marital status are NOT considered in the calculation of a credit*based insurance score. Federal law prohibits credit bureaus from including this information in credit reports * thus insurers could never include these factors within a calculation, nor analyze credit records to determine this information.  State rating laws also prohibit the use of race, color, creed, ethnicity or religion for rating purposes therefore insurers do not collect that very specific information that maybe required by the proposed regulation in order to measure its impact on Florida's policyholders.

Insurers that consider credit information through credit-based insurance scoring in their pricing decisions do so for only one reason because it is an objective tool that allows those insurers to underwrite or rate business with a greater degree of certainty and accuracy. Credit-based insurance scoring does not replace traditional underwriting and rating factors; it simply provides additional, statistically significant information to the process of determining the risk of loss.

Every actuarial study on the issue has reached the same conclusion, that there is a very high correlation between the credit-based insurance scores and the likelihood of filing insurance claims. A 2003 study by EPIC Actuaries, of the use of credit history and insurance risk, found that a consumer's credit-based insurance score is unquestionably correlated to that consumer's propensity for auto insurance loss. Even more significantly, the study found that insurance scores consistently allow an insurer to rate policies on a more individual basis.  After fully accounting for all overlap and the relationship with other risk factors, such as age/gender, territory, model year, driving record and coverage limit, the EPIC study found that the propensity for loss decreased as the insurance score increases. For example, after adjusting for other variables, individuals with the lowest credit-based insurance scores were found to incur 33 percent higher losses than average, while those with the highest scores incurred 19 percent lower losses than average.

Credit-based insurance scores allow insurers to write business that they may not have accepted in the past, and to offer lower rates to many insureds. The vast majority of consumers stand to benefit accordingly * with rates refined to reduce disproportionate subsidies of high-risk individuals.  A report on the impact of insurance scoring in Arkansas for the year 2005 found 89 percent of consumers either received a discount for credit or it had no effect on their premium.   

We acknowledge that the OIR is charged with adopting rules necessary to implement Florida's insurance scoring law and to ensure that insurer use of credit information is neither abused nor utilized in an unfairly discriminatory manner.  However, the proposed rule holds the use of credit-based insurance scoring up to more stringent, numerous and unnecessary tests than any other underwriting or rating factor considered by insurers.

The regulation, as drafted, is focused on the process of credit-based insurance scoring and ignores the clear legislative intent of the Florida legislature to allow insurers' to use this valid underwriting and rating tool.  This over-regulation of credit-based insurance scoring is unnecessary because certain personal or demographic information is already prohibited from inclusion in a score.  Additionally, Floridians benefit by paying less for insurance due to the correlation between credit and insurance loss has been well documented numerous times, for both auto and homeowners risks.