October 8, 2007 - Using credit scores to set insurance rates on home an auto policies is a fairly common practice nationwide. The reason for this, as described by insurers, is that those with lower credit scores tend to file more insurance claims than people with higher scores. While this is statistically true, the practice discriminates against a large number of consumers with low credit scores who never have an accident or file a claim. On Friday, Massachusetts State Insurance Commissioner Nonnie Burnes banned the use of credit data by insurers to set auto policy premiums.

Massachusetts is the only state in the country where state regulators set the rates for automobile policies. In all other states, rates are set by market competition. The result of this policy is that there are now only 19 companies offering automobile insurance in the state.

In an effort the change this situation, the state is about to begin a one year conversion to "managed competition" in automobile policies. To kick the process off, Burnes began the process of setting rules for insurers to follow during the transition period.

Her original draft of the rules was setup to ban the use of socio-economic factors for underwriting. These included a ban on the use of information having to do with income, marital status, home ownership and occupation. But the rules didn't preclude the use of credit reporting data or credit scores.

This omission caused an outcry from consumer advocates. In the end, Burnes bowed to pressure and included the credit data ban in the final set of rules which were issued on Friday.

Although most of the rules have a one year expiration data, the rules with regard to the use of credit data are of indefinite duration. Burnes said, "We need to better understand how credit information in rating and underwriting affects all lines of insurance and determine whether or not its regulated use is in consumers' best interests. Prohibiting it in the auto market will give us the time we need to assess its impact across the board and come up with the right solution for Massachusetts consumers."

Some insurers had opposed the idea of restricting socio-economic data when setting rates. But surprisingly, a number of insurers supported the idea; as did the state's Attorney General.

Under the managed competition scenario, insurers will no longer have their rates set by regulators. Instead, they will file their own rates with the state. These will be reviewed by regulators and either approved or denied. It is hoped that the new system will attract other companies into the state and help drive the price of auto insurance down.

by Jim Malmberg

Note: When posting a comment, please sign-in first if you want a response. If you are not registered, click here. Registration is easy and free.

Only registered users can write comments.
Please login or register.